Podcast | Beginners' guide to investing – Real estate series 1

Definition:

The word ‘Real’ comes from the Latin root res for ‘things.’ But some others say it’s from the Latin word rex, meaning ‘royal,’ since back in the many centuries past, kings used to own all the land in their kingdoms. Owning real estate, when read that way, quite literally means you are lord of the land and king of the realm.

The British Empire was as great as it was considered to be not simply because of the wealth it amassed but also because of the landmass it amassed. The American Constitution initially restricted voting rights to only owners of real estate. In India’s own past, outside of royalty, it was landowners – the thakurs, the zamindars – who wielded the greatest power within the social structure.

The goal behind investing in real estate is to put money to work today and allow it to increase so that you have more money in the future. The profit, or the "return," you make on your real estate investments must be enough to cover the risks you take, the taxes you pay, and the costs of owning the real estate investment such as utilities, regular maintenance, and insurance. Real estate investing is essentially like playing Monopoly, but with real properties. To win at real life Monopoly, you buy properties, avoid bankruptcy, and generate rent so that you can buy even more properties.

Types of Real Estate:

There are four kinds of real estate. It is important to understand this classification because the rules governing the acquisition and management of each of these kinds of properties are different. The four types are:

Residential real estate: this includes both new construction and resale homes. The most common category is single-family homes. But of course, there are also condominiums, co-ops, vacation homes, etc.

Commercial real estate: this includes shopping centres, malls, medical and educational institution buildings, hotels, offices, etc – basically anything that is built to produce income. And that is the reason apartment buildings – even though they are primarily used for residential purposes – are actually classified as commercial real estate because they are owned to produce income. Mixed use real-estate investments are a sub-category here in which the same building complex could house various different kinds of commercial establishments.

Industrial real estate: this includes manufacturing buildings and property, as well as warehouses. The buildings can be used for research, production, storage and distribution of goods. Some buildings that distribute goods are considered commercial real estate. This classification is important because the zoning, construction and sales are handled differently.

Land: this includes vacant land, working farms, and ranches. The subcategories within vacant land include undeveloped, early development or reuse, subdivision and site assembly.

How Does One Make Money in Real Estate Investments?

Real Estate Appreciation – no, this is not like modern art or wine appreciation classes, this is literally the value of your property growing over time. This could be because the land around your own property becomes scarcer or busier, because a mall came up there, or because the locality came under easier access to public transport systems like a Metro station, or indeed because of the upgrades you put into your house to make it a more attractive option to buyers or renters.

Cash Flow Income – in this type of investment, you focus on buying a real estates property, such as an apartment building or an office building, and operating it, so that you can collect a steady stream of cash from rent. Cash flow income can be generated from letting your property out as rental houses, storage units, office buildings etc.

Is Real Estate Investing For Me?

The big question that we all ask ourselves – is real estate for me? Conventional wisdom was that you made a home by the time you retired so you did not have to worry about where to live especially in the face of no income or little by way of savings. But that is changing – more and more youngsters are interested and involved in early real estate investments. The question then is – should you too? As with all investment options, there is no real answer to “should you?” Different people have different appetites for investment, and which one suits them is more a matter of personal taste than dogma. One size, naturally, does not fit all. We are often asked the question – Which is a better investment: real estate or stocks? It is akin to asking someone if they liked chocolate or vanilla, spicy or sweet, or if they heard Laurel or Yanny. It all comes down to the person and their preferences.

If you are interested in real estate, then there definitely are some do’s and don’ts which we will cover in the coming episodes. But if you want to invest in real estate, as a general rule – educate yourself, get as much information as available; seek professional advice if you need; focus on income, expenses, expectations of return of investment; demonstrate financial discipline – plan your balance sheet; research the property as much as you can; plan for contingencies.

We can’t stress this one point enough though – real estate is rarely ever a ‘get rich quick’ scheme. You cannot liquidate real estate assets in the blink of an eye, so while patience is a virtue when you are looking to acquire a good property, it is almost a necessity when you are trying to get rid of it.