Top 5 Strategies of Real Estate investing that it is followed by businesses:
Investing in real estate can be a smart way for businesses to save money on net present value (NPV) by providing a tangible asset that incomes from increased value of a property over time.
Appreciation
Appreciation as one of the primary ways that real estate investors can earn a profit on their investments.It occurs when the market value of a property increases due to various factors such as the location of the property, the overall real estate market conditions, and the demand for properties in that area, inflation rate or even political matters.
When a business buys a property, it can hold onto it for several years over a period of time, allowing it to increase in value. By holding onto the property, a business can potentially make a profit when they decide to sell it, which can help offset the initial investment and improve the NPV of the investment.
Appreciation can be a powerful way for investors to build wealth over time, as it allows them to earn a profit on their investment without having to sell the property. Also Tax benefits can help lower the overall cost of owning the property, which can improve the NPV of the investment.
There are two main types of appreciation in real estate investment: forced appreciation and natural appreciation. Forced appreciation refers to the intentional actions taken by an investor to increase the value of a property, such as making renovations, adding amenities, or improving the landscaping. Natural appreciation, on the other hand, occurs over time as the value of the property increases due to market conditions.
Rental Income
On the other hand, if the business decides to rent out the property, it can generate cash flow from rental income. This can help offset the cost of the property and provide additional revenue for the business specifically If the rental income is greater than the expenses associated with owning the property.
Fix-and_flip
The strategy of renovating the houses they need to repair based on their condition, called The fix-and-flip strategy, helps businesses make their real estate investments profitable by adding value to a property and increasing its marketability. By fixing up a property, a business can attract more potential buyers and sell the property for a higher price than they initially paid for it, resulting in a larger profit. But there is a remarkable risk here. It is the cost of repairs and renovations. If a business underestimates the cost of improvements or runs into unforeseen issues during the renovation process, they may end up spending more money than they planned and reducing their potential profit. This can result in a lower profit or even a loss on the investment in a bad unexpected market.
Development
One of the most interesting aspects of investing in the real estate market is development strategy. Buying land or property with the intention of developing it into a finished product, such as a residential or commercial building, and then selling or renting out the finished product.
However, there are also significant challenges associated with the development strategy. One major challenge is the high upfront cost of land acquisition and development, legal matters, Urban construction permits, funding, development conditions and timeline, selling process and all causes of delays or increased costs. These risks should be considered for risk mitigation.
REITs
REITs, or real estate investment trusts, are a strategy that allows investors to invest in real estate without actually owning the physical property. Instead, investors can buy shares in a publicly-traded REIT, which owns and manages a portfolio of income-producing real estate properties. This strategy provides investors with the opportunity to invest in a diversified portfolio of properties, which can help to spread risk and increase the chances of earning stable returns.
REITs typically offer regular dividend payments to investors, which can provide a steady stream of income. Finally, investing in a REIT is often more liquid than investing in physical property, as shares can be bought and sold on public stock exchanges.
Economic changes are the big challenges for this type of property investing that impact the performance of the underlying properties, and therefore the value of the REIT’s shares. It is directly related to interest rate risk, as rising interest rates can decrease the value of the underlying properties and negatively impact the performance of the REIT.
The profitability of investing in REITs can vary depending on market conditions and the specific REIT in question. According to the National Association of Real Estate Investment Trusts (NAREIT), the total return for the FTSE NAREIT All Equity REITs Index was 35.95% in 2020, compared to the S&P 500’s return of 18.40% during the same period.
The followed table shows the comparison of real estate investing strategies by businesses in different factors like potential of profits, risks and investing lifetime.
Strategy | Definition | Potential of Income | Example of Profit Margin in 2020 | Example of Profit Margin in 2022 | Risk Potential | Investing Lifetime |
Appreciation | Strategy of investing in a property with the expectation of its value increasing over time | High, as the value of the property can increase significantly over time | 10% profit margin on property value | 15% profit margin on property value | Market risk, natural disaster, and unexpected changes in local regulations can impact the property value | Long-term investment |
Rental Income | Strategy of investing in a property with the expectation of earning rental income from tenants | Steady, with potential for gradual increases over time | 7% profit margin on rental income | 8% profit margin on rental income | Tenant default, maintenance and repair costs, and changes in market demand for rental properties | Long-term investment |
Fix-and-Flip | Strategy of buying a property that needs repairs or renovations, making those improvements, and then selling the property for a profit | High, as the property can be sold for a significant profit after improvements are made | 20% profit margin on sale price | 25% profit margin on sale price | Cost of repairs, market volatility, and unforeseen issues during renovation process | Short-term investment |
Development | Strategy of buying land or property with the intention of developing it into a finished product, such as a residential or commercial building, and then selling or renting out the finished product | High, as the value of the finished product can exceed the cost of development | 30% profit margin on sale price | 35% profit margin on sale price | High upfront cost, construction delays or issues, and market demand for finished product | Long-term investment |
REITs | Strategy of investing in a publicly-traded real estate investment trust that owns and manages a portfolio of income-producing real estate properties | Steady, with potential for dividend payments and capital appreciation over time | 5% profit margin on dividend payments | 6% profit margin on dividend payments | Changes in the real estate market, interest rate risk, and underlying property performance | Long-term investment |