Investing in real estate is having the certainty that you are protecting your money, it is one of the safest businesses, both for the return on investment that can be perceived, and for its stability in the economy. Real estate is one of the businesses that can best cope with crises, which indicates that it is an ideal sector for investments.
Despite the fact thatBlue world city Islamabadknow that at present different events have arisen that have filled the economy with uncertainty, where decreases in the search for real estate have been observed; the purchase intention has not changed, it has simply been postponed.
This indicates that it is time to invest in developments, real estate or properties that represent a low risk and high return on investment.
On this occasion we want to talk to you about some aspects that must be taken into account to make a good real estate investment.
Real estate investment opportunity
If the idea of starting to invest that money that you have frozen is already in your mind, without giving it a productive use, it is time to take into account some investment opportunities.
But what is the best option to invest?
As investors, we are not willing to lose money; The investment funds of banks are an option with low risk, each financial institution has different investment rates, where you can win or be affected, this depends on the decision made at the time of saving your money in the bank.
Something that you should keep in mind is that, if you invest $ 1,000,000 in the bank during a year with a 6% rate, the annual return will be $ 60,000, however, the devaluation of the money during that period may represent a decrease in the value of that amount of return (this is what we call the effect of depreciation).
There is also the option of investing in a bank investment fund in dollars, it can be thought that because of the currency exchange, investing in dollars is better, since it represents greater value against the Mexican peso, however, when investing in a fund in dollars, it is very likely that a return in dollars will not be obtained, which indicates that the only advantage of this investment is a hedge of the MXN against the USD.
So why invest in property and not other assets?
Take into account the example of $ 1,000,000 in the paragraph above, if that money had not been invested in an investment fund of a bank, on the contrary, it would have been invested in a property that, over time, could increase its capital gain and had an annual return on investment in effect at the currency exchange (that is, at the change in current inflation) the percentage of ROI and the value of money would be higher.
invest in properties
When investing in a property you are investing in an asset, it is not a currency, although other forms of investment such as the stock market or bitcoin are also assets, the market they handle is very volatile, that is, the value of the return it can go up or down from one day to the next, directly affecting the investor. Unlike real estate investing which has a much more stable market.
One of the main advantages of buying a property is that a return can be obtained, that is, if you invest in an apartment for rent, you will obtain a monthly income of the value of the rent (return on the initial investment), in addition, you will have a consequence of goodwill.
The Capital Gain! Really understanding how capital gains work is one of the elements that will allow us to make or not a good decision when investing in real estate. But, this is something that we will explain in more detail later.
Criteria to take into account for a real estate investment
Real estate investments are different, because you are investing in an asset and not in a currency. There are three criteria that must be evaluated to make a good decision when investing in properties.
- Cost effectiveness
- profitability when investing
- It is the performance or income that a real estate investment gives us, it can be measured through the capitalization rate (Cap Rate).
We leave you a formula to calculate it:
- Cap Rate: is a rate that allows knowing the value of a property based on the annual income it generates.
- Value: corresponds to the initial value of the asset (property)
- Annual yield: corresponds to the flows or income of the investment.
- Cap Rate = Value_____ ÷ Annual yield
Let’s look at it in a more detailed example:
If you have a property with an investment value of$ 16,781,000 which you want to rent for $ 50,000.00 per month, you will be receiving an annual income of $ 600,000.
To know the Cap Rate, we use the formula points.
Cap Rate = 16,781,000 ÷ = 3.5%
Analysis: You would be having an annual return percentage of your investment of 3.5%, it is not a high or favorable percentage if you make a comparison when investing in a bank savings fund, where rates of 5.8% or 6% are offered. annual.
We can see another Cap Rate exercise to make a comparison between the two.
If you have a property with an investment value of $ 3,476,200 which you want to rent for $ 19,500 per month, you will be receiving an annual income of $ 234,000.
To know the Cap Rate, we use the corresponding formula
Cap Rate = 3,476,200 ÷ = 6.7%
Analysis: this represents a higher percentage of return compared to the first exercise.
This is the first step you should take when investing in property. Knowing the percentage of return will provide a greater perception of whether or not it is a good investment, taking into account that not all real estate investments offer the same level of return.
Note : the percentage is calculated with a rule of 3
The value corresponds to 100% of the investment
The annual yield corresponds to a percentage X
Rule of 3 taking into account the first exercise:
16,781,000 ————- 100% 600,000 x 100 ÷ = 3.5 (% return)
600,000 ————? 16,781,000
How to know if the area where I am going to invest has a capital gain.
“Not all properties have the same capital gains” It is a lie to say that, for buying a property, it automatically has capital gains.
capital gain when investing
There are some factors that determine the type of capital gains a property has. The geographical location, social level of the population of the area, amenities and others.
To determine the capital gain of a property it is necessary to categorize the type of areas, in this casethey are divided into the following 5.
These are the areas that over time have already obtained their capital gain and will be revalued over the years, it is determined by the infrastructure that the area has, that is, streets, business centers, shopping centers, bars, theaters, schools, hospitals, cultural centers, restaurants, among others.
These are areas where the price of the properties already includes all the nearby benefits that the resident of that property can enjoy.
invest in reconversion area
It is considered as an area where there are investment opportunities, this is because they are surrounded by consolidated areas. There are many people who do not have the monetary capacity to buy and invest in consolidated areas and must look for alternatives (reconversion areas) that provide similar benefits.
invest in suburbs
They are characterized by having a good infrastructure, in the same way they are far from consolidated areas, which is why it is not common to see corporate centers, however, there are shopping centers, parks, stores. They have amenities that meet the expectations of a good lifestyle.
Due to what is generated in the suburbs, there are horizontal developments, the value of the land is cheaper and because it is located in areas far from consolidated properties there is a high demand for land, which indicates that the capital gain will gradually increase.
Investing in the suburbs offers a regular or fair capital gain and a reasonable return on investment.
In general, they are often confused with reconversion areas, since they are central, that is, close to the historic centers. Culture and the social environment affect their capital gain despite being close to consolidated areas, which is why they do not fall into the category of reconversion areas.
invest in social interest
These are the areas of social interest, where no value is generated as a real estate investment due to the scarce economic contributions in maintenance, security, amenities, among others, which represents a deterioration in the area, reducing capital gains.
You already know the different areas in which the capital gain is divided, it is important to determine where the property is located where you want to invest in order to obtain a good return on investment.
Is it better to consider the quality or the price?
When a real estate investment is going to be made, buyers often make comparisons of the property’s value per m2, betting on the one with the lowest price.
It is a double-edged sword, because by lowering prices, the construction budget is lowered, which represents a lower quality in the materials used for the property.
Despite the fact that the finishes can be “good” and with good details, the truth is that, if the resistant and appropriate materials are not used, it can generate losses over the years, either due to deterioration, earthquakes, leaks, landslides, among others.
Some of the points to evaluate are:
The architectural proposal: It refers to the validity that the proposal will have over time.
Terrain exposure: refers to the quality of the construction site, the exposure it has to disasters, earthquakes, tornadoes, floods. Evaluate that the price corresponds to the characteristics of the land, including street violence, because if it is the nearby streets there are fights, demonstrations, among others, this can reduce the capital gain.
Structure: it is important to know the resistance of the property’s columns, in case of earthquakes this represents great value. Investing in a development, with a structure that meets security standards is taking care of your assets.
Walls: It is important to see the quality of the walls for privacy, leakage and durability.
Finishes: The quality of the finishes is a trigger in the purchase decision, they are the final details of an architectural proposal.
Amenities: The target audience must be determined and what the amenities will be (gyms, parks, bars, meeting rooms, among others).
In conclusion, you should consider:
Acquire the property at the correct price, in accordance with the conditions of the property, taking into account the Cap Rate.
Invest in a location that provides added value to the property, the reconversion areas are the most recommended.
Identify the demand for products and evaluate population behavior, identify future needs.
Evaluating the architectural level in the long term, does it generate added value or not?