JonathanLIVE
11-12-2007, 04:57 PM
Just recently I did a writeup comparison of Real Estate and Virtual Real Estate as an investment. I wanted to share it with everyone here in the hopes it may help some, and also encourage some great discussions :) .. This is Part 1 of a 3 part series.
Table of Contents
Advantages of Real Estate Investment -- Part 1
Disadvantages of Real Estate Investment -- Part 1
What is Virtual Real Estate?
The Advantages and Disadvantages of Old Single Model Virtual Real Estate
The Advantages and Disadvantages of New Multi Model Virtual Real Estate
Conclusions
Throughout history the value of real estate and the laws and regulations surrounding it have evolved. What is great about this evolution, is that it creates new opportunities for discovery and adaptation of the market.
Not long ago there was a fluctuation in the real estate market that shook many in the industry and changed the perceived value and investment protection put into real estate today. Once again, this has created opportunities for those who can see them, while causing others to run for the hills.
Advantages of Real Estate Investment
The case for real estate, as an investment, has many attractive qualities. It also has some drawbacks. Some of the more commonly understood benefits include:
- Creating a diversification of your profile that is documented as part of your assets.
- Returns on investment from tenants that keeps ahead of inflation
- Performance improvements can be done to increase the value of your real estate. This is very popular with purchasing low cost low value properties and with a few improvements significantly raising the value and then selling. Because of this control over the investment real estate, it is often preferred over other investment models.
- Lending institutions favor real estate investment, making such investments easier to access for more people (though this has recently taken a downturn in the mortgage lending market)
- Income potential is rather high with deals that can range anywhere from $5000 upwards to $150,000 in a single transaction.
- It is a socially accepted investment which provides status among peers within any social circles and all classes.
The last point is something that many do not consider. However, for the sake of this comparison it is an important element to note, as there are emotional attachments that are culturally instilled to make real estate a more attractive proposition.
Disadvantages of Real Estate Investment
While these benefits are rather well known, there are other aspects to real estate that have drawbacks. Some of the more commonly understood issues include:
Cost of Buying, Selling and Operating – Compared to other investments, the cost of transactions within real estate are high when dealing with private real estate (the more common market). Larger transactions can have payments differed, but must be paid nonetheless. The ownership of real estate, of course, also means maintenance because just like all things in this world, it requires upkeep. When dealing with rental properties, there is the added risk of tenants damaging the property which will increase the cost of your investment.
Ongoing Management – With any real estate you are dealing with how it will be handled as an investment, as well as managing all the other day-to-day issues of the property. Using a company to take care of this for you or doing it yourself, either way costs you time and money.
Acquisition Difficulties – As many of you already know, you can spend a great deal of time looking for the right types of properties to acquire. Once found it can be equally as difficult to complete the purchase when others may also have interest in the real estate. To have real diversification of your real estate you need to have locations that are geographically far apart, which can also be difficult to handle.
Market Cycles – Just like most investments, there are cycles within the real estate market. These cycles correspond with those of the leasing and investment markets. Of course this all happens with variations in supply and demand which can vary with any number of economical factors within a given region. A city or town may have its entire economy powered by one or two big companies that may close down or experience downsizing which in turn throws the leasing market. The investment cycles recently experience changes based on the investment markets that affect property prices. Both these cycles of course impact the decline and growth of rental properties along with investment properties. The bottom line to these cycles is timing. Good and bad timing can make or break fortunes.
Measuring Performance – Measuring the risk and performance of your real estate can be very difficult where there are no real accessible benchmarks for comparison.
Money Pit Syndrome – Without due diligence, the emotional elements of investing in real estate can often cause people to invest in properties which they think will sell quickly, only to find that they do not move as they had hoped, or the market cycle mentioned above affects their position. Then one is left paying an additional mortgage which they will struggle to maintain. This situation often results in foreclosure, after an extended period of loss.
The last point is the most common hazard that occurs within the real estate investment industry. While we like to think that we make investment decisions that are purely driven by logic, reason, and numbers, it is often more human elements that, in the end, make our decisions. The more successful investors are those who have learned to put aside the emotional and social markers that affect most; they see opportunities for what they are, make assessments accordingly, and so have greater odds of success.
Typical Example of Real Estate Earnings:
Rental property
$10K down payment for financing
Mortgage $500 a month
Tenant Pays $800 a month
Profit $300 a month
Multiplied by 10 properties = $3000 a month profit and a real estate asset value increase or decrease depending on lease hold improvement requirements with tenants
Investment property
Real Estate Purchase Value $150K
$15K down payment for financing
$10K invested in improvements
$6K to cover mortgage during improvements and selling period (hopefully 3 months)
Sell for $190K
Gross Profit $24K
Minus fees of approximately 5% ($9500)
Net Profit $14,500
Multiplied by 5 properties per year = $72,500 profit before taxes and a healthy relationship with financial institutions, assuming each investment property moves within the given period of time. I knew one investment property owner who sat on over $2 million in properties for over a year and lost all their capital due to the market not moving to buy and ended up losing their entire investment.
These are just examples which can scale to any amount you might be dealing with, whether property values are lower or higher, though it is understood that bigger deals yield higher returns.
I will continue with the other 2 parts another time.. until then.. any further details and information others might like to add to this would be welcome.
Enjoy
Jonathan
Table of Contents
Advantages of Real Estate Investment -- Part 1
Disadvantages of Real Estate Investment -- Part 1
What is Virtual Real Estate?
The Advantages and Disadvantages of Old Single Model Virtual Real Estate
The Advantages and Disadvantages of New Multi Model Virtual Real Estate
Conclusions
Throughout history the value of real estate and the laws and regulations surrounding it have evolved. What is great about this evolution, is that it creates new opportunities for discovery and adaptation of the market.
Not long ago there was a fluctuation in the real estate market that shook many in the industry and changed the perceived value and investment protection put into real estate today. Once again, this has created opportunities for those who can see them, while causing others to run for the hills.
Advantages of Real Estate Investment
The case for real estate, as an investment, has many attractive qualities. It also has some drawbacks. Some of the more commonly understood benefits include:
- Creating a diversification of your profile that is documented as part of your assets.
- Returns on investment from tenants that keeps ahead of inflation
- Performance improvements can be done to increase the value of your real estate. This is very popular with purchasing low cost low value properties and with a few improvements significantly raising the value and then selling. Because of this control over the investment real estate, it is often preferred over other investment models.
- Lending institutions favor real estate investment, making such investments easier to access for more people (though this has recently taken a downturn in the mortgage lending market)
- Income potential is rather high with deals that can range anywhere from $5000 upwards to $150,000 in a single transaction.
- It is a socially accepted investment which provides status among peers within any social circles and all classes.
The last point is something that many do not consider. However, for the sake of this comparison it is an important element to note, as there are emotional attachments that are culturally instilled to make real estate a more attractive proposition.
Disadvantages of Real Estate Investment
While these benefits are rather well known, there are other aspects to real estate that have drawbacks. Some of the more commonly understood issues include:
Cost of Buying, Selling and Operating – Compared to other investments, the cost of transactions within real estate are high when dealing with private real estate (the more common market). Larger transactions can have payments differed, but must be paid nonetheless. The ownership of real estate, of course, also means maintenance because just like all things in this world, it requires upkeep. When dealing with rental properties, there is the added risk of tenants damaging the property which will increase the cost of your investment.
Ongoing Management – With any real estate you are dealing with how it will be handled as an investment, as well as managing all the other day-to-day issues of the property. Using a company to take care of this for you or doing it yourself, either way costs you time and money.
Acquisition Difficulties – As many of you already know, you can spend a great deal of time looking for the right types of properties to acquire. Once found it can be equally as difficult to complete the purchase when others may also have interest in the real estate. To have real diversification of your real estate you need to have locations that are geographically far apart, which can also be difficult to handle.
Market Cycles – Just like most investments, there are cycles within the real estate market. These cycles correspond with those of the leasing and investment markets. Of course this all happens with variations in supply and demand which can vary with any number of economical factors within a given region. A city or town may have its entire economy powered by one or two big companies that may close down or experience downsizing which in turn throws the leasing market. The investment cycles recently experience changes based on the investment markets that affect property prices. Both these cycles of course impact the decline and growth of rental properties along with investment properties. The bottom line to these cycles is timing. Good and bad timing can make or break fortunes.
Measuring Performance – Measuring the risk and performance of your real estate can be very difficult where there are no real accessible benchmarks for comparison.
Money Pit Syndrome – Without due diligence, the emotional elements of investing in real estate can often cause people to invest in properties which they think will sell quickly, only to find that they do not move as they had hoped, or the market cycle mentioned above affects their position. Then one is left paying an additional mortgage which they will struggle to maintain. This situation often results in foreclosure, after an extended period of loss.
The last point is the most common hazard that occurs within the real estate investment industry. While we like to think that we make investment decisions that are purely driven by logic, reason, and numbers, it is often more human elements that, in the end, make our decisions. The more successful investors are those who have learned to put aside the emotional and social markers that affect most; they see opportunities for what they are, make assessments accordingly, and so have greater odds of success.
Typical Example of Real Estate Earnings:
Rental property
$10K down payment for financing
Mortgage $500 a month
Tenant Pays $800 a month
Profit $300 a month
Multiplied by 10 properties = $3000 a month profit and a real estate asset value increase or decrease depending on lease hold improvement requirements with tenants
Investment property
Real Estate Purchase Value $150K
$15K down payment for financing
$10K invested in improvements
$6K to cover mortgage during improvements and selling period (hopefully 3 months)
Sell for $190K
Gross Profit $24K
Minus fees of approximately 5% ($9500)
Net Profit $14,500
Multiplied by 5 properties per year = $72,500 profit before taxes and a healthy relationship with financial institutions, assuming each investment property moves within the given period of time. I knew one investment property owner who sat on over $2 million in properties for over a year and lost all their capital due to the market not moving to buy and ended up losing their entire investment.
These are just examples which can scale to any amount you might be dealing with, whether property values are lower or higher, though it is understood that bigger deals yield higher returns.
I will continue with the other 2 parts another time.. until then.. any further details and information others might like to add to this would be welcome.
Enjoy
Jonathan