Real Estate Investor

A real estate investor or entrepreneur is a person who is actively or passively involved in real estate investments. An active investor buys a property, refurbishes it and later sells it for a profit. This is known as flipping. On the other hand, a passive investor might contact a real estate agency to find and manage an investment property on their behalf. Real estate is usually an attractive form of investment because it offers capital appreciation, depreciation, cash flow, leverage and tax benefits.

Why Entrepreneurs Invest in Real Estate

Capital appreciation occurs over a period of time, but an investor may ‘trigger the equity’ in a property by redeveloping it or its environs to raise the value. Generally, the true value of a residential property is determined by the ‘comparable sales.’ This uses the principle of substation to guesstimate the value of a property. Experts arrive at a final price by studying the recent sales of similar properties in the area and assigning it to the property in question.

Depreciation is one of the benefits a real estate investor enjoys. Although a property may increase in value over time, property owners are permitted by the government to depreciate the value systematically over its predicted useful life span. Depreciation is a legal tax-deductible practice. Besides depreciating their property, a real estate entrepreneur can claim the interest part of his or her monthly mortgage payment as a tax rebate.

Leverage is another good reason people venture into real estate investment. If a real estate entrepreneur acquired a £100,000 property with 100% cash, and the property appreciated in value by 5% (£5000) in 1 year, this means the investor received a return on investment (ROI) of 5% – that is supposing no other costs were incurred. But if the entrepreneur got 95% of the money through a loan, only £5,000 cash will be brought to the closing table, while a mortgagor such as a bank would finance the remaining £95,000 to buy the house.

Supposing there is a similar £5,000 value appreciation on the property, the investor’s £5,000 cash contribution would gain an equity increase of £5,000 in a year, that is a 100% ROI. However, the principle of leverage works the other way round too. A depreciation of £1,000 in the value of the property would result in a negative 20% ROI on the $5,000 deal.

In recent times, the practice of real estate investment has become more popular following the continued rise in value of property and low interest rates. However, a persistent drop in property value and an increase in interest rates would severely diminish market confidence.

Types of Real Estate Investment

Although they come in various forms and structure, there are generally four major types of income-producing real estate:

Offices: These are the flagship investment of many property owners. On average, they are the biggest and highest profile types due to their characteristic location in city centres and sprawling suburban office areas.

Retail property: These come under a wide variety ranging from single rented buildings in pedestrian areas to large enclosed shopping malls. However, the increasing shift of retail to the online space is becoming a concern for some property investors.

Industrial property: Industrials are often labelled the ‘staple’ of the typical real estate investor. In general, they entail smaller average investments, have little need for management and offer lower operating costs than the previous two.

Multi-family residential property: This type of real estate investment is usually preferred by less adventurous investors because they provide the most stable form of returns. No matter the economic conditions, people will always need a place to dwell in. As a result, residential occupancy tends to be considerably high in regular markets.

Becoming a Successful Real Estate Entrepreneur

Joint ventures, property management and wholesaling are a few examples of how investors profit from a real estate deal. It often requires a bit of business savvy and lots of information to be successful in real estate investment. Although some universities and training programmes offer courses on real estate investment, people do not necessarily need a degree to be successful real estate entrepreneurs.

  1. Planning the investment

Real estate investors approach their activities in real estate as a business in order to create long-term or short-term objectives. They write business plans to enable them to visualise the big picture – this is to maintain focus on the key objectives. A solid plan eases the complications often associated with real estate investment.

  1. Knowledge of the market

The real estate business is highly information-led. This means without a good understanding of the market it would almost be impossible to make a profitable decision. Successful real estate investors continue to monitor the markets and keep themselves abreast of latest developments including consumer behaviour, mortgage rates, unemployment rates and so on. Knowing all these facts create potential opportunities for the prepared entrepreneur.

  1. Niche investment

A smart investment practice is to choose a focus segment. Some real estate entrepreneurs concentrate their efforts on either residential property, office complexes or other commercial property investments. Taking the time to learn about the peculiarities of each market enables investors to develop a high level of understanding. Specialisation can increase the chances of success.

  1. Requesting referrals

Referrals make up a significant percentage of a real estate investor’s business. They get opportunities from business partners, clients, associate, tenants, and anyone with valuable business information or prospects. Successful entrepreneurs encourage referrals from their circles of influence.

  1. Building networks

A successful real estate investor has a rich network of contacts. This is built from years of attending conferences, trade fairs, business meetings and casual contacts. Without a strong network, a real estate investor will find it difficult to expand their horizon. Entrepreneurs grow their networks by being more extroverted and willing to interact with potential business partners.

  1. Understand the risks

Real estate investors know their risk tolerance limits and work within the boundaries. Being self-aware of their comfort-zone allows an investor to make deals that do not necessarily hurt them. This stems from the ability to allow certain investments ‘go’ by having a buffer amount. Only investors who are aware of their risk tolerance limits can successfully compete in stiff markets.

Published on 4th July 2017

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