Investing in real estate is one of the most popular forms of capital investment. People frustrated with low-interest deposits tend to look first for permanent “physical” assets, and only then for financial instruments of a virtual nature (such as stocks ).

Is it worth investing in real estate after the pandemic disruptions and the subsequent price hike of these assets? Let’s try to answer this question and look at the most popular forms of investing in real estate.

Housing prices in our country are rising by about 10% annually. However, it may also reach 20%, as in the case of Gdynia, Sosnowiec or Bialystok between 2020 and 2021.

Of course, there are also years of price declines (such as, for example, after the global crisis in 2008), but the trend is relatively upward.

A rate of return around 8-10% per annum should be considered pretty solid, compared to, say, low-interest deposits.

However, most of the apartments that are bought for the purpose of investment are not empty, their rent brings another regular return on investment.

Investing in the real estate market is not always a sure profit

However, investing in real estate is not easy. Home prices won’t go up forever – some experts believe we’re already dealing with a real estate bubble .

In addition, many people do not invest with cash, but with restricted funds, which in the event of a further increase in interest rates may cancel out the profit.

In addition, buying an apartment and taking care of it requires time, knowledge and experience. The apartments need to be renovated regularly, and the tenants will never find themselves alone.

Despite these difficulties – investing in real estate can be an interesting form of investing your savings. Let’s check out 7 different investor approaches.

Subcontractor, or how not to buy, but to earn

Investing in real estate has many names – in addition to choosing an apartment or building in a suitable location – you must prepare an appropriate strategy.

The first two are so convenient that if they are used, then there is no need to buy real estate. So it is an excellent choice for people who do not have a lot of capital.

We are talking about subletting, that is, renting an apartment in order to rent it out to someone else at a higher price.

It is possible that we will correctly “adjust” a particular property, thanks to which we will be able to charge a higher rent. This investor approach is possible, of course, only when we agree with the landlord about the renovation and the possibility of subletting the four corners to other tenants .

These provisions must be included in the lease so that there is no misunderstanding on the matter.

Subletting makes more sense in the context of a short-term lease, which will allow for a much higher rate of return. Some people even sublet a dozen apartments or so – we’re dealing with a really big company.

However, its profitability was brutally checked by the epidemic, when short-term rents were completely weakened.

Buying real estate for long-term lease

When we do not want to sublease a property to someone, but only acquire the full amount of the rent and rely on the property price increase, we have to buy one.

Unfortunately, this investor method has become so popular (for example thanks to different types of prices on the Internet) that apartments can disappear from the market 15 minutes after an ad is placed … In addition, the buyer is usually a man who comes to inspect an apartment with Money in his pocket.

In such conditions it is difficult to find interesting four corners, especially if we also want to use the mortgage … However, developers are working at full capacity, so if we can’t find anything interesting in the secondary market, we always have the market primary.

Most often, the apartment purchased in this way is intended for long-term rental.

This solution is convenient because contracts are usually signed for at least a year, so we don’t have to actively search for tenants.

However, it should be noted that a renovated apartment will generate costs and problems with noisy tenants may occur .

In addition, some months the apartment will be empty, and the demand for rent is not always high (as it is in the 2020 pandemic), so finding a tenant quickly in a poor real estate location does not have to be so easy. 

Real estate rentals are taxed at 8.5 percent.

Renting real estate for short periods

Long-term rent gives you peace of mind, but on the other hand it does not allow you to fully “invest” the purchased building.

We will rent an apartment of 50 square meters in a big city for PLN 2,500 per month. With daily rent, this amount can be achieved in 10 days .

Of course, not everything is so simple. The property for short-term rental must be in an attractive location, i.e. in the center of a large city or tourist destination.

In addition, there is a lot of competition in this segment of rents, which means that the “full occupancy” of our premises can only remain in the realm of dreams.

What are the other drawbacks with this form of rental?

• The need to constantly search for clients.
• Customer service – handing over keys, providing information, complaints, etc.
• Cleaning after each visit. It probably wouldn’t be possible without collaborating with a cleaning company.
• Unexpected events will actually completely set back the business. A good example of this is the pandemic that “killed” the short-term rental market for a while.

flipping 

Flipping is about buying a property that is not in the best condition (but with potential) in order to renovate it and sell it for a profit.

Perhaps the times of great flippers are behind us.

Before rapid increases in real estate prices, for example in Lodz or Upper Silesia, some were able to look for really interesting crumbs for little money.

After a proper renovation and giving the space a loft, return rates can be triple digits.

However, there are still interesting opportunities in the market, especially in record auctions or municipal auctions. However, it should be noted that we usually meet other pinball players there, as they completely penetrate the market for these properties.

If we sell the property within 5 years of purchasing it, we will pay income tax at 19% on the profits you made from the transaction.

Investing in commercial real estate and lands

If not apartments, maybe commercial buildings or land? These properties are for investors with a wealthier portfolio.

It is better to buy land with the aim of selling it at a profit – a lease agreement will not bring us much income. It is certainly safer to invest in plots of land, as their price (as it was during the pandemic) can go up quickly.

And we don’t have to fight any battles with offices, as in the case of wanting to cultivate plots of land. It should also be noted that when we do not have the status of a farmer, we can freely purchase a piece of agricultural land of only 0.30 hectares.

The pandemic has been kind to building plots, but the same cannot be said for commercial properties. Many companies have either gone out of business or have switched to remote work.

This resulted in massive abandonment of office space.

Remote work is likely to be a permanent component of our reality, so buying commercial (office) real estate for rent is pointless.

Especially when we want to back it up with a mortgage. The best solution would be to rent a garage or small premises for, for example, hairdressers who cannot easily transition to remote work.

Property tax is much higher for commercial buildings than for private buildings.

Developing crowdfunding and investing in hotel apartments

A specific form of investment in real estate is community financing for the construction of apartment buildings or hotels. When the appropriate number of investors is collected, the company starts implementing the project.

Agreements signed with investors and the method of settlement may be of a completely different nature. In some cases, the project contractor undertakes to pay annual interest on the capital borrowed from us.

It can also be a division of profits from renting out rooms, as in apartment hotels.

So it is sometimes just a simple loan given to the developer. In this case, we do not buy any real estate, we only earn on paying off debts with interest.

However, this type of investment may result in real estate being transferred to us as part of the paid up capital.

Companies from this line of business usually promise us very favorable rates of return. You just need to remember the hidden costs and the fact that the property does not need to be built.

When the developer goes bankrupt, our invested money will be forfeited. Similar risks occur with corporate bonds.

REITs – investing in real estate funds

Another way to invest in real estate, as in the case of sublease, does not require the participation of very large capital from investors.

It is possible to allocate funds in the so-called REITy (English abbreviation for Real Estate Investment Trust ).

what are they? They are investment funds that own thousands of properties and profit from renting and selling apartments effectively.

They operate in the form of joint stock companies, so that we can buy their shares and thus earn their price increase. Unless, of course, the real estate market grows in a certain period.

REITs have not yet been launched in our country, but thanks to a suitable brokerage account, we can invest, for example, in US REITs .

One of these funds, among others, is the American Tower Corporation. REIT shares can be purchased on the brokerage platforms included in our rating. At XTB, we will not pay any commission on stock trading.

The financial instruments offered, especially those with leverage, carry a risk of exposure to losses in excess of the invested capital.

 Also read: CFOs should invest in technology

How do you evaluate the profitability of investing in real estate?

ROI profitability analysis requires appropriate knowledge. However, with the help of formulas, we can quickly assess the potential rate of return.

Suppose we want to predict the profitability of investing in long-term rentals with the help of a mortgage. In this case, you can use the ROI formula:

Profitability = (rent x number of months) / property purchase cost x 100

It is worth assuming that the number of months for which the apartment will be rented is usually about 10.5 months. We assume that the building may remain empty for 1.5 months due to renovation or the absence of a tenant.

We calculate rent as the difference between the rent the tenant pays and the monthly mortgage payment.

The above formula is one of the simplest ways to calculate the profitability of an investment. It is only useful in the initial stage of analysis. Sophisticated investors use more sophisticated methods of evaluating rate of return.

Advantages and disadvantages of investing in real estate

Investing in real estate is a very broad issue. However, let’s try to evaluate them, listing the most common advantages and disadvantages of this type of capital investment.

cons: 

1. Real estate is a physical asset, so you have to take care of its condition . Taking care of the buildings incurs costs and takes a long time. The solution to this situation is investing in REITs, i.e. a form of hypothetical investment in real estate.
2. A lot of financial resources are needed for investment , even a small apartment is currently considered a big expense.
3. Real estate is not a liquid asset . Sometimes it is necessary to wait several months for the buyer or seller to agree to transactions at a price satisfactory to us.
4. We usually have to wait many years to get a return on investment .
5. A mortgage is often required to purchase a property. As interest rates increase, so do loan payments , which kills the return on investment.
6. In order to trade real estate successfully, you need knowledge and experience . Beginners can lose this type of investment.
7. It is likely that a cadastral tax will appear in our country in the coming years, which will reduce the profitability of investing in real estate.

benefits:

1. Real estate is a tangible physical asset that gives some investors a sense of certainty .
2. Real estate prices are on the rise in the long run . This has to do with the loss of purchasing power of money. Real estate, like gold, has its value.
3. Minimal risk of real estate prices falling to zero , as in the case of bankruptcy of a company.
4. In addition to selling the property at a profit, we can passively earn money from renting it out .
5. Real estate can be used as collateral for a mortgage or a cash loan, thanks to which we will get a larger amount from the bank .
6. The interest rate on mortgage loans is lower than, for example, on cash loans .
7. The property is functional, we can live in it or use it in various ways, such as restoring it to increase its value. Virtual assets do not offer this possibility.

sources:

https://www.expander.pl/raport-expandera-i-rentier-io-ceny-mieszkan-iii-kw-2021/