Investments in new buildings: main nuances
Investing in real estate is a popular way to invest money, allowing you to invest conservatively without significant risk of loss. There are five main ways of investing: buying for resale, renting out, investing in real estate assets (including overseas), buying shares in construction companies and their bonds. Renting out is considered the least profitable option, but this can be increased through the use of leverage such as mortgages. REITs (real estate investment partnerships), which buy them to rent out and pay dividends to investors, are suitable for currency investors. The most profitable instruments are growth funds and shares in individual real estate developers, but they offer a high level of risk and losses can amount to the entire investment. Let’s look at the two most common options – these are the first two on our list.
Buying an apartment for rent
One of the most popular and easy forms of investment is buying an apartment to rent out. The main condition is that it should be renovated and equipped with everything you need. Location is an important factor – the closer it is to the subway, office and educational institutions, attractions and parks, the higher its attractiveness for tenants. An investor can choose long-term or daily rent. In this case, the monthly income will be deducted by the costs of utilities and ongoing repairs. Profits from long-term are usually small and equal to 2-5% per annum. However, housing tends to increase in value over time.
If there is active construction in the neighborhood, rental prices may fall in the future, due to the fact that other owners will also want to rent them out. The choice of house depends on the needs of future tenants: for students – near institutes and entertainment infrastructure; for families with children – near clinics, kindergartens and schools, as well as parks; for short-term rentals and tourists – in the city center or near attractions or major train stations.
It should be taken into account that with the option for a short term, the daily income will be higher, but the cost of repairs and maintenance will also increase. In this case, it makes sense to look at the option in apartment complexes, where there are management companies that will help with finding tenants and management. They usually have a higher profitability.
Buying an apartment for resale
The choice of strategy plays a key role. Experts advise choosing new buildings to make a quick profit. The cost of housing in new residential complexes increases as the construction progresses. Investing money at the beginning of the project and reselling it after construction is completed is the most widely used method of making money from it. The average annual increase in the value of a house bought at the excavation stage is between 15% and 30%. However, you need to choose a reliable builder that uses project financing and escrow accounts to protect your investment. Of course, it is good to be able to sell it before the house comes into operation to avoid growing competition. Investing in areas with prospects, such as the construction of subways or large shopping malls, increases the chances of a successful resale. Acquiring residential property in upscale neighborhoods with limited supply can also be profitable.
But you should always be careful in such cases. But it is not so easy to play on these factors if you are not a professional investor, and you have to learn about the constantly changing plans for the development of cities from the news in the media – when everyone has already heard about the latest ones. The subway system is an example. According to experts, if everyone is already talking about the fact that it is going to be built somewhere, don’t hesitate – the prices are based on the immediate proximity of the subway in the area in advance (you should expect the next price increase only when the station is put into operation).
Risks of investing in real estate
Residential real estate has always been an attractive investment because people always need a place to live. However, it has its own peculiarities such as high transaction costs, low liquidity and low real profitability. In addition, there are other factors such as taxes, maintenance and equity risks. Purchasing a home can be a solid way to save money, but it pays to choose your investment wisely, considering its profitability. For example, a real estate option in a sparsely populated or new neighborhood may not be profitable. Because it is an expensive commodity, people approach it cautiously and take into account all the details such as the view from the window and the location of the infrastructure. The smallest nuances can determine the buyer’s decision, as not everyone can afford to do it twice.
However, it is not without certain risks. The following factors should be taken into account: incorrect valuation, which may lead to low financial returns; unsuitable location, which may reduce the attractiveness and value of the chosen location; unscrupulous tenants, who may damage the property and demand additional expenses for restoration or reduction of the rental rate; delays or freezing of the construction project, including the possibility of bankruptcy of the developer; unforeseen situations, such as man-made accidents, fires or floods, which require fear of damage to the property; and the possibility that the property may be damaged by unscrupulous tenants. When choosing a place to invest your money, you need to be careful, conduct due diligence and be able to properly assess the market and its trends.