How to become a real estate investor, and is it necessary to have a lot of money for this? We analyze the most popular ways to make money on “squares”.
There are many approaches to real estate investment that allow you to invest in meters with almost any amount. Each of them has its pros and cons. For example, investing in a parking lot (in Danish “parkeringspladser”) is far from the same as investing in residential and commercial premises.
Let’s look at the main methods used by investors:
Buying an apartment for rent
One of the most obvious and common types of investment. The apartment is bought on the secondary market or from the developer – the main thing is that there is a repair and everything necessary for life, otherwise additional investments will be needed. The location of the object is very important – proximity to the metro, business centers and universities (for long-term rent), to tourist attractions, large exhibition and conference halls and parks (for daily rent). For the purchase, you can use a mortgage or own funds.
The investor rents an apartment for long-term or daily rent and receives a monthly income minus utility bills and “wear and tear” of the object. “Wear and wear” refers to any expenses for repairing broken household appliances, fixing furniture, and wallpapering. These costs must be included in the calculation of the investment attractiveness of the apartment.
The profitability of long-term rental in megacities is low and depends on many factors: the cost of the object, its uniqueness and location, the quality of finishes and furniture, equipment, etc. On average, it is 2-5% per annum. Profitability from renting out is low, even lower than on deposits. But the real estate itself, as a rule, grows in price in the long run.
Flippers are “dealers” of apartments. They buy undervalued properties from auctions or with urgent sale, with poor repair, without furniture or other problems. The main selection criteria for a reseller are a liquid area and the price of an object below the market price. Then the flipper improves the characteristics of the object (makes repairs, buys furniture, solves problems with documents, etc.) and resells it.
At the same time, you need to remember the need to pay taxes on profits from such transactions. If the apartment is the only one and was owned for less than a certain period (for example, 3 years), when it is sold, personal income tax will be withheld from the difference between the purchase and sale prices. If the investor owns more than one home, then for sale without tax, you will have to wait several years from the date of purchase. Therefore, flippers always include tax when calculating the investment plan.
You can increase the yield on your own funds through a mortgage. In this case, the flipper buys an apartment on a mortgage, quickly makes repairs and resells, closing the debt and getting his profit.
Buying a shop or storage room for rent
It is possible to invest in real estate with a small amount. For example, on Lokalebassen.dk you can buy a shop (“butikslokaler”), a garage or a storage room for later rental or resale in Denmark if you expect demand for them in this property to grow.
Investments in commercial real estate
Buying commercial real estate for rent is more suitable for professionals, because you need to understand the legal intricacies of working with a business. In addition, you will need experience and competence in the selection of an object, so it makes sense to contact a specialist.
Stock instruments for real estate investment
In order to invest in the real estate market, it is not necessary to buy a house. You can participate in the growth of the market indirectly through stock instruments. For example, through closed-end real estate funds. The assets of such funds are placed in real estate, more often commercial, and the investor earns a rental yield or the difference in the value of a share when buying and selling.
Finally, you can buy shares and bonds of developers on the stock exchange. True, their price can fluctuate quite a lot and depends not only and not so much on the cost per square meter, but on market conditions, prices for building materials, the results of a particular developer, government incentives for the industry and many other factors.
Market know-how is digital meters. So far, individual developers are testing this technology: they allocate a pool of apartments in their facilities under construction and sell them “by the meter”. That is, the investor does not buy the whole apartment, but a square meter or even part of it at the price that the developer considers the market price. When the developer leases the object and sells the finished apartment to the future tenant, he gives the difference in the cost per square meter to the investor.
By itself, the release of digital meters takes place on blockchain technology, and ownership is registered in a distributed digital registry. The scheme allows you to significantly reduce the threshold for investment in living space.
However, investments in tokenized real estate are now available only to qualified investors, moreover, the experience of issuing and circulating such assets is still being formed.
How to choose a real estate investment strategy?
The goals of investing in real estate can be different, it depends on which method and strategy the investor chooses.
First you need to save large savings. The purchase of square meters is well suited for this task, since real estate is a real asset that grows in value over long investment horizons.
The second is more important to receive a monthly income. Such people, as a rule, buy apartments for regular rent.
Still others choose more active ways of investing – looking for undervalued properties for resale or promising areas, investing in repairs.
Fourth believe in the growth of the market and want to participate in it, but with a small amount. This is suitable for buying parking spaces for rent or stock instruments.