In 2000, the world had a population of 6 billion people. Today, the world’s population is estimated at more than 7.7 billion. The increasing population coupled with continued global economic growth and urbanization has led to opportunities in the real estate industry. A research report estimated that the global real estate industry was worth almost $220 trillion. In 2017, the spending in real estate development in the US reached $1.27 trillion.
The industry is known for its large barriers to entry. This is because most ordinary people don’t have the resources and the expertise to build houses. Therefore, the people or companies who have invested in real estate are often very successful. This article will explain the real estate industry, why you should consider investing in it and the types of investments you can make.
Why invest in real estate
There are a number of reasons people invest in real estate:
Excellent returns: In most countries, the demand for real estate products is increasing. This is happening mostly because of the increased demand of housing. This demand is growing as more people move to urban areas and as their economic status improves. All this is leading to better returns. For example, in 2017, a tower in Hong Kong was sold for more than $5.7 billion.
Safe investment: Real estate is considered a safe type of investment. This is because once built, the chances of the property getting destroyed are very small. In the unfortunate event when this happens, the damage is usually covered by insurance. Other investments like stocks are usually insured.
Good cash flow: The real estate industry is excellent in terms of cash flow. This is because once built, the tenants will pay monthly or quarterly rent. As a result, with this cash flow, you are able to plan your finances. This is especially important when you are investing for retirement.
Diversification: Real estate investment is an excellent way to diversify your portfolio. If you have invested in other asset classes like stocks and bonds, real estate can help you diversify your returns.
The value increases over time: The value of real estate tends to increase over time. In most cities, it will continue to increase as more people move from rural areas.
Tax benefits: Since housing is a problem facing many countries, some governments have introduced tax incentives to deal with the problem. The most common tax benefits of real estate investments in the US are depreciation, capital gains, tax free borrowing and appreciation tax.
Types of real estate investments
There are six main types of real estate investments:
Land: An undeveloped piece of land is a type of real estate investment. This is because in most places, the value of the land keeps rising. Therefore, you can buy a piece of land and leave it undeveloped for a few years and then sell it.
Residential real estate: This is where you build houses and lease them to the customers who will live in them. The buildings in this industry are apartments, townhouses, houses and vacation houses. As the landlord, you agree with the tenants on the duration of the stay and the period which the rent will be paid. Most people have an agreement to pay the rent on a monthly basis.
Commercial real estate: These are office buildings that are mostly built in cities and towns. They are targeted towards companies and government agencies. Commercial real estate developers make money from the multi-year leases they sign with their customers. Others make money when the buildings are bought by the companies or by other investors.
Retail real estate investments: These are mostly shopping malls, strip malls and other storefronts. The investments target consumer-facing companies like department stores, salons and pharmacies. In recent years, the growth in the e-commerce sector has affected the growth in these types of investments.
Industrial real estate: These are buildings that target manufacturers and other industrial companies. Examples of such buildings are warehouses, distribution centers, and factories. A major benefit of these types of investments is that they tend to attract longer-term leases from large companies.
Mixed-Use real estate: These are real estate projects that combine residential, commercial, and retail investments into a single project. For example, a large shopping mall can have a residential division and an office block in another one.
Ways you can invest in real estate
As an investor, you have a number of ways you can invest in real estate. These are:
This is where you build houses and lease or sell them. You can decide to invest in either of the six real estate products mentioned above. To achieve an optimum return, you need to first conduct a feasibility study on the development you want to build. For example, it is advisable to build residential property in places which are growing. The benefit of this type of investment is that you will own the entire project.
A common problem with real estate is that the initial costs are usually high. To solve this problem, a new concept of investing in real estate has emerged. A number of companies have come up with an investment plan where people come together and invest in real estate projects. This process allows you to invest as little as $500 in a project. By doing this, you will own a part of the project and generate income from it.
Real estate stocks
There are many real estate companies that are listed in many exchanges. This is one of the easiest ways you can invest in the industry. By buying a stock in a real estate company, you become part-owner of the company. This means that you will generate your return when the stock price rises and when the company distributes profits through dividends and buybacks.
There are a number of different types of real estate companies you can invest in. First, you can invest in building companies. These are companies that are contracted by real estate investors to build the houses. Examples of such companies are KMB Homes and Morgan Sindall.
Second, you can invest in the companies that own the development projects. Some of the biggest real estate companies you can invest in are Brookfield, Prologis, and Westfield.
Third, you can invest in private equity firms that have invested a lot in the real estate industry. Examples of such firms are Blackstone, Carlyle, and Colony Capital. However, it is important to note that some of these companies have vast holdings in other sectors. This means that you should research on the percentage of the revenue that comes from the real estate holdings.
Real estate investment trust (REIT)
A REIT is a company that builds or buys real estate holdings. There are hundreds of REITS that you can invest in. REITs differ from other types of real estate companies because of how they are mandated to distribute their revenues. For example, in the United States, REITs are mandated to distribute at least 90% of the taxable income to shareholders each year. The challenge with this is that it is very difficult for companies to grow.
They should also invest at least 75% of their resources in real estate. The should have a minimum of 100 shareholders. Also, no more than 50% of the shares should be held by less than five people.
There are four main categories of REITs. These are Equity REITs, Mortgage REITs, Public Non-listed REITs, and Private REITs.
Before you invest in a REIT, it is important that you research about the portfolio of properties that they own. Some of the best REITs are those that house government agencies. This is because these agencies tend to have long-term leases. Examples of REITs are Ventas, Digital Realty Trusts and Independence Realty Trust.
Real estate ETFs
Other than stocks and REITs, you can also invest in real estate ETFs. These ETFs are made up of hundreds of companies in the real estate sector. The benefit of investing in a real estate ETF is that you are able to own many companies at once. There are a number of types of these ETFs. There are those that focus on each of the above categories and others that invest in a diversified portfolio.
Real estate indices
Finally, you can invest in real estate indices. These indices track the real estate industry. For example, the S&P real estate sector tracks all the public real estate companies in the US. The companies in the index are valued at more than $1.2 trillion. It is then divided into equity real estate investment trusts and real estate management and development.
Start investing in real estate
As mentioned, the real estate sector is expected to grow as the population and the world economy grows. This means that you too can take part in the industry. A good way to start is to invest in real estate stocks, ETFs and indices.