Real Estate Investment 101

A short primer on the basics of real estate investment and how you can make money with it.

Real estate in the Philippines has started to boom in recent years, with all the developments and projects across the islands. Savvy individuals have started to invest in condominiums, office buildings, tracts of land, and other real estate projects. How does one get into these investments and drum up their own cash coffers? 

To put it simply, the goal in real estate investment is to put money to work today and allow it to increase so that you can sit on it and it will grow to a sizable amount for the future. The profit, or “return,” you make on your real estate investments must be enough to cover the risk you take, taxes you pay, and the costs of owning the real estate investment such as utilities, regular maintenance, and insurance.

Real estate investing can actually be as conceptually simple as playing monopoly when you understand the basic factors of the investment, economics, and risk. To win, you buy property that you think will return good value for your investment, avoid bankruptcy, and generate income from rent so that you can buy even more properties and carry on with the cycle. However, keep in mind that “simple” does not necessarily translate to “easy.” If you make a mistake, consequences can range from minor inconveniences to major disasters. Just like playing in a casino, the wrong bets can leave you with the sharks at the end of it all.

When you invest in real estate, there are several ways you can make money:

Real Estate Appreciation

This is when the property increases in value due to a change in the real estate market; the land around your property becomes scarcer or busier like when a major shopping center is built next door or upgrades you put into your real estate investment make it more attractive to potential buyers or renters. Real estate appreciation is a tricky game; it is riskier than investing for cash flow income, as it requires a fair amount of foresight and a bit of luck in order for your investments to pay off. 

Cash Flow Income

This type of real estate investment focuses on buying a real estate property, such as an apartment unit or an office building, and operating it which allows you to collect a stream of cash from rent, which is the money a tenant will pay to use your property for whatever specified time you have agreed upon. Cash flow income can be generated from well-run storage units, apartment buildings, office buildings, and rental houses to name a few.

Real Estate-Related Income

This is income generated by specialists in the real estate industry such as real estate brokers (who make money through commissions from buying and selling a property) or real estate management companies who get to keep a percentage of rents in exchange for running the day-to-day operations of a property. This type of real estate-related income is the simplest to understand. For example, a hotel management company gets to keep 5 percent of a hotel’s sales for taking care of the day-to-day operations such as hiring maids, running the front desk, mowing the lawn, and washing the towels.

Ancillary Real Estate Investment Income

For some real estate investments, this can be a huge source of profit. Ancillary real estate investment income includes things like vending machines in office buildings or laundry facilities in low-rent apartments. In effect, they serve as mini-businesses within a bigger real estate investment, letting you make money from a semi-captive collection of customers.

There are several ways to buy your first real estate investment. If you are purchasing a property, you can use debt by taking a mortgage out against a property. The use of leverage is what attracts many real estate investors because it lets them acquire properties they otherwise could not afford. However, using leverage to purchase real estate can be dangerous because, in a falling market, the interest expense and regular payments can drive the real estate investor into bankruptcy if they aren’t careful.

When you are ready to start the process of real estate investing, I hope this will help you decide which type of real estate investment is most appropriate for you.