Sunday 28th October, 2007

 

Real value to estates

 
 
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They say when the stock market becomes less and less attractive, people go after risk-free investments, and the real estate market leaps forward.

Real estate refers to land and all immovable property attached to it as well as certain rights attached to the property. Real estate is a major class of assets. There are other major classes of assets—bonds, stocks, commodities and cash. A diversified investment portfolio will include most of these classes.

Real estate investment goes beyond owning your primary residence. It is using cash to buy a property that will yield an income in some form or fashion at some point in time. The gain or benefit comes either as a stream of income, such as from rentals, or via capital gain, based on increasing value of the property with time.

The one major advantage of real estate as an asset class is the relative ease with which you can determine its value—simply because it is tangible or “real” property, hence the term: real estate.

Compared to the asset classes on the stock market, where there is only paper representation of the value, with real, tangible property, the investor can see with his own eyes and compare neighbouring property with his own.

The potential risks involved in such an investment are also mostly visible, and this makes it less risky than other asset classes. In addition is it easy to determine the associated costs involved in purchasing a property, as well as the anticipated costs of maintenance and upgrade. The effects are also visible.

One may ask the question: if property as an asset class is such a good investment why does anyone sell? In truth, investments typically are considered good, if they can be turned into cash within a reasonable time.

Recall that we noted: the primary residence, the place where you live, is not expected to be sold, so we exclude it from the class of assets.

However, people do sell the primary residence, if it can return capital gain. Some people build large houses, with the intention of selling it when the children move away. Some people recognise that their area has grown into a high-end real estate area, and sell to capitalise on unanticipated gains.

These are more often mild forms of real estate investing. But in terms of an investment portfolio, you begin to dabble when you can buy a second or third property, purely for gain.

Some people buy up property to give to their heirs. This is genuine investment, since the buyers seek to capitalise on time, and expected appreciation of such property. They hardly see themselves as real estate investors however.

We often hear how much money we can make in the stock market, but seldom does anyone try to sell us the value of return on the real estate market. Why? Real estate requires a long term vision, time and patience.

It requires dealing with tenants, renovations, utility bills. These can be troublesome, since good tenants are hard to come by, and people don’t care for other peoples property as well as they would their own. In addition people do not conserve electricity or water, unless they pay directly for it.

The benefits, however, are many: cash flow, property appreciation, leverage and amortisation, as well as certain tax advantages.

Some people have grown financially independent on real estate alone. It involves access information. You have to know where things are happening and why, and you have to know it before others do.

-continues next week

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