Welcome to the part two of the Seventh chapter of Investing for the future, the seventh chapter of the series is all about real estate investment and we already covered the types of real estate investment in the first part, the second part is to dive deeper into the methods of making money in real estate.
Real estate is the property, land, buildings, air rights above the land and underground rights below the land. The term real estate means real, or physical property. Thus investing in a piece of land, house & building considered as real estate investment.
Before proceeding with the rest of the article, we recommend you to read the first part of chapter 7
Click here to Read the part One: Real Estate Investment – Investing for the future – Chapter 07
What are the methods of making money in real estate?
The return on investment from a real estate can be derived in multiple ways, each method has associated pros and cons and different levels of risk, however, it is not rocket science and you just need to know to add and multiply. a quick recap of types of real estate investment is a better way to start with the methods.
Types of real estate investment
Residential property – Property used for dwelling and housing-related purpose
Commercial property – property used for business, office and commercial purpose
Mixed development property – property used for housing and business purpose
Industrial development property – property used for factory, warehousing, manufacturing purpose
Popular methods of real estate investment
known as buy/build and rent, most popular method of real estate investment is renting it to tenants, your property can be any of above-mentioned types, the owner responsible for paying the mortgages and taxes and cost of maintenance of the property and tenants pay a rental which is covered by a written (sometimes verbal) agreement, in a practical context, rent will be slightly more than the associated cost of owning the property as the owner keeps his profits on top of the associated cost.
The key advantage of this method is that the owner earns a sufficient amount to cover his cost and the property appreciation over time also belongs to him.
Real estate traders
the short term method of real estate investment, also known as property flipping, where an investor buys a property with the intention of selling it within a short period for a profit, typically the investor buy the property for less than market value or for a bargain and ads value by renovating and modifying the property, then he sells it with a profit. They repeat this over and over again.
This method needs advanced knowledge in real estate since a single wrong decision can cost your investment for a six, mostly real estate traders operate when the market demand is high and economic factors are favourable.
Real Estate Developers
this method considered to be the profitable real estate investment, the investor buys a property with the intention of developing and selling, the development can be
- buying a large land, develop into plots and selling, known as land sales
- Buying a few plots of lands and construct houses and selling
- Developing apartment, Office complexes and industrial complexes to sell etc.
The development could be time-consuming and the investor should be able to properly execute the project, he should properly account the acquiring cost, development cost, cost of funds and appreciation to set the selling price to make it a profitable investment.
Owning Shares of Real Estate companies
this method is not so popular method in Sri Lanka, however, this can be the smartest option available to an investor if he is not so sure about the market and technicalities. There are mutual funds specifically focused on real estate segments and there are listed companies in Colombo stock exchange, the giants of the real estate and construction industry, buying some shares of those companies automatically make you an investor and all you need to have is a little bit of share market knowledge
Learn to invest in the share market: Investing for the future – Chapter 06 – Investing in Share Market
Colombo Stock exchange sector wise classification has the list of companies operating under Land & property and construction & engineering, following companies are few examples from the sectors.
Overseas Realty PLC, Ease West properties PLC, Millennium Housing Developers PLC, Access engineering PLC, MTD Walkers PLC etc. (Names are randomly selected and we have no monetary benefits)
We have looked at a few methods of real estate money making, of course, it is a very basic introduction and mastering it is purely depends on the investor, real estate investment has much more variations and lots of potentials, make sure to understand your risk-taking ability before starting with any type of investment and make careful choices to avoid losing your hard earned money.