Among the best investments I have ever made is in real estate, where a property I had acquired 30 years ago has increased in value by 30 times. That is a rate of return of 100 percent every year for the last 30 years. I would really be hard pressed to think of any other investment or business that could yield that kind of return. Now, hold on, before you plunk in your hard-earned money or inheritance into making a real-estate investment, there are a number of things you would need to consider and be aware of.
First thing you need to consider is the size of the investment. Real- estate investments tend to be an all or nothing proposition, unlike making equity investments in the stock market or buying fixed-income instruments that are traded in lots or blocks. In real estate, you need to buy the condominium unit, the house and lot, the building, the industrial lot per title and so on.
Aside from the sheer size of the investment, it is a more involved and costly process with the change in title into the investor’s name. When you buy shares in the stock market or invest in fixed-income instruments, the transaction gets executed immediately with confirmation done on the same day and settlement of payment and ownership no more than three days, at the total cost of maybe one-fourth percent to one-half percent. In real estate investments, you are looking at paying documentary stamp taxes, capital gain taxes, broker’s commissions and other transfer fees that will be at least in the range of 5 percent to 10 percent. Not only that, the whole process from the actual closing of the transaction to having the physical possession of title to the property could take months!
As you can imagine, real-estate investments are also less liquid than corporate bonds, government securities or listed shares in the stock market. This is primarily due to the above reasons of larger amount, costly processing and numerous requirements and, of course, the time it takes to complete the transaction. In addition, there is a higher risk of fraud. While there has been tremendous progress in ensuring the integrity of real-estate titles, there are still cases of fraud involved where the titles are spurious and numerous titles have been issued on the same property.
Unlike buying equities or fixed- income securities, real-estate investments require holding costs, such as the payment of real-estate taxes, payment of association dues, common usage area charges, securing the property, insurance premiums and maintenance expenses. Of course, it would be nice if the property is revenue generating but that is not always the case, or even if revenues are generated sometimes they would still be insufficient to cover the carrying cost of the property, especially if a loan was taken out to make the purchase.
It should also be taken into account that the total gain on a real-estate investment is not only due to rental/lease revenues generated but also in terms of capital appreciation. While over a very long holding period, like 20 or 30 years, the chances of capital gains are almost certain. However, if your investment horizon is shorter, say only five or even 10 years, it is possible that you could have a negative return when you encounter the bursting of a real- estate bubble or a downturn in the economy. This is particularly true when property prices are already inflated or fully valued.
Other factors in making a real- estate investment also depends on what the property will be used for. If the investor intends to use it for his residence, business or other needed applications, deciding to make the real-estate investment is easier. Hindsight is always 20/20 and in an economic boom, everyone is an investment genius. It is only when things get rough that we separate the men from the boys.
Comments may be sent to georgechuaph@yahoo.com.
1 comment
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