Real Estate is defined as ‘an interest in land’, to broaden this definition, interest means ownership interest or also called as fee-simple interest, or it could mean leasehold interest.
What is the difference between ownership interest and leasehold interest?
In ownership interest or fee-simple interest, the investor has the full rights of ownership of the land and assumes the risks and responsibilities of being the landowner. Meanwhile, in a leasehold interest exists when the owner of the land agrees to pass some of his rights on to a tenant in exchange for a payment of rent.
What are the characteristics of a real estate investment?
The real estate produces a relatively consistent return on investment, it has a component that pays a regular, steady income stream, but can sometimes fluctuate. The characteristics of the real estate make it unique compared to the other investment alternatives.
No fixed maturity
Real estate investment does not mature. This characteristic of a real estate property allows the investor to buy a property, execute a business plan, and then sell the property when it is appropriate.
You can touch and feel a real estate property. You have a certain degree of physical control over the investment, if there is something wrong with the investment, you can fix it.
It has to be managed hands on. The concerns of the tenants must be addressed, landscaping should be handled, and renovations should be cared for.
The information asymmetry exists between the investors and tenants which allows a greater profit to be made by those with adequate information, expertise, and resources.
High transaction costs
Real estate investments have high purchase costs and sale costs. Upon purchase, there are real estate and agent related commissions, lawyer’s fee, engineer’s fee, and other costs that can appraise the price effectively beyond the property price it was exposed to the market. Upon selling the property, a substantial brokerage fee is the only cost, to expose the property to the market properly.
There is no public exchange exists for real estate trades. Real estate properties are difficult to sell. The time-cost in between the time you sell the property and when it was sold.
Underlying tenant quality
Determine the quality of the underlying tenancy when you are assessing an income-producing property. Why? Because you will not be only purchasing the physical real estate, but also the income stream from the tenants.
Variability among Regions
Location is the most vital aspect of the real estate investment. The selection of which market to invest in has a larger impact on the return on investment.
The major types of investment properties are offices, retails, and residential properties. The properties can generate income and appreciate. The way to determine the value of a property is to have it appraised by an accredited appraiser. You can either invest in income-producing and non-income producing properties. Any leased property is an income-producing investment, however, those non-producing investment still has a capital return.