Considering all the complexity, calculations, and risks, investing in the real estate sector, or any sector for that matter, is a complicated process. There are many people interested in investing in the real estate sector who are still oblivious to the many investment schemes and may want to know exactly how it would be profitable to invest. Keeping that in mind, we have compiled a list of different types of real estate investments and other factors (such as pros and cons) that you need to consider before investing in real estate so that you don’t have to suffer from indecision.
Real estate investments: What and Why?
Investing in real estate can mean so many things; from buying and/or leasing a residential or commercial property, to buying land or other real estate assets, everything can be considered an investment. Real estate is a booming industry. It always has been and is thriving as a field of investment for the investors of all groups. And since this is one of the most sturdiest sectors, people investing in this industry hardly incur any losses. Even during the economic downturn and inflation, property prices don’t usually depreciate. And due to tax benefits, stable cash flow, and other tangible benefits, real estate is one of the most sought after sectors in the world.
Types of real estate investments
House Flipping
In the middle of 2000, during the middle of the economic downturn, the concept of house flipping saved the housing industry of the west. Although new in Bangladesh, investing in flipper houses is slowly gaining popularity. But what does a flipper house or house flipping actually mean? – Let’s say person A bought a house from person B at as low of a price as possible. Then person A renovated the entire house and sold it quickly to a new buyer (let’s say person C) at a higher price. Here person A, who bought the house from person B and sold it to person C at a profit after renovating it, is called a ‘flipper’. And the house that was flipped or sold is called a ‘flipper house’. And the entire process is called ‘house flipping’.
We have an excellent article on flipper houses which you can take a look at if you want in-depth information on them.
Advantages
- For those who are investing in real estate for the first time, a flipper house can be an excellent investment opportunity. And since there are bargaining opportunities, you can actually buy a property at a lower price.
- Flipper houses are also viable for those who are thinking of relocating and buying a new home for themselves to live in. Because then you don’t have to worry about fixing things.
- Renovation is an important aspect of house flipping. If you can do it right by understanding the needs of the potential buyer, house flipping can prove to be a very profitable investment.
Risks
- Renovating a flipper house (or any house for that matter) properly and making it suitable for sale is a complex process. It also has a big cost push. There is also a risk of large financial losses if the house is not properly repaired or the house is not properly promoted.
Long-term renting or leasing
Renting or leasing a property for more than 6 months can be considered as ‘long-term renting or leasing’. As we mentioned earlier, people’s residential demand almost always remains the same and house rents do not normally go down even during economic downturn or inflation. Long term renting or leasing is definitely one of the more popular and profitable types of real estate investments.
Advantages
- A long term rent or lease guarantees a stable cash flow for a certain period of time.
- Another advantage of a long-term rental is that there is no need to worry about utility bills for a long time as it becomes the tenant’s responsibility.
- Also, when it comes to the safest types of real estate investments, long term renting or leasing will definitely place higher in the list. The process will include a legal contract to be signed by both parties. This will state what can and cannot be done on your property, how to compensate for property damage, etc.. As a result, your property will be in a proper condition in that period.
Risks
- It is relatively difficult to find someone who will rent or lease your property for a long period of time. And even if you do, there is no guarantee that they will take care of your property or follow all the steps as mentioned in the legal contract.
Short-term renting
The concept of a short-term rental is more popular in tourist spots. For example, if you have a house in Cox’s Bazar, you can rent it to tourists as a vacation home. This trend of vacation home rental is now very popular, thanks to Airbnb and other similar kinds of businesses. However, short-term rentals in the vicinity of a famous hospital, educational institution or other important establishment in addition to tourist spots can be a great way to invest in real estate.
Advantages
- Although there is no guarantee of a stable cash flow, you can expect big profits out of interior decoration, certain house types, and arrangements suitable for tourists, especially if it’s a vacation home.
- Since no one will stay for long in these kinds of houses, the hassle of home renovation or repairing is minimal.
- You will have total control over the rent according to demand.
Risks
- Typically there is no practice of renting through a legal contract like long-term renting or leasing. As a result, it is not always possible to ensure proper security of the property.
- Regularly preparing the property according to trends is an important aspect of a short-term renting scheme and can be costly at times. Especially if you want to put it up on the market as a vacation home for tourists.
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts or REITs are specialized companies that manage their income from real estate assets in a variety of ways. These companies trade on the capital market or stock exchange. Although not yet introduced in Bangladesh, these types of real estate investments are very popular around the world as a less risky way to invest in the real estate sector.
Advantages
- The liquidity in investing in real estate investment trusts is higher than any other investment in the sector.
- Dividend-paying stocks ensures stable cash flow
- There is less concern about property management when it comes to REITs
Risks
- Tax benefit is one of the major benefits of the housing sector. But in countries where real estate investment trusts are in circulation, the dividends are kept within the purview of regular income tax.
- Transaction fees are higher.
Crowdfunding
The word ‘crowdfunding’ is very popular these days! Crowdfunding is the process of raising funds for business or social work through consumers and individual investors. In real estate crowdfunding, investors are mainly connected through the internet to invest in real estate properties. It’s a lot like equity investing because the investor can become a shareholder or partner of the property by doing so.
Advantages
- There is an opportunity to become a real estate investor without having to invest a large amount of money. This is a great opportunity not only for individuals but also for small corporate companies.
- One of the greatest advantages of real estate crowdfunding is that non-accredited investors can also invest in them. But what is ‘Non Accredited Investor’? – The Securities and Exchange Commission follows certain regulations in the stock market, one of which is that you cannot invest if you don’t earn a certain amount of income or own assets because you will be considered a ‘non-accredited investor’. But real estate crowdfunding does not follow any such policy.The US-based real estate crowdfunding website Diversity Fund can be a great example of that. They received a minimum of $500 in funding from non-accredited investors, much less than the average amount invested in real estate. However, the company has received a commendable annual return of 18.6%.
Risks
- Since the entirety of crowdfunding is most of the time managed and processed over the internet, there is no real way to verify or authenticate certain information.
- Most real estate crowdfunding is organized only for non-accredited investors. As a result, individuals or organizations willing to invest large sums can’t actually participate.
Construction Partnership
Construction partnership is one of the most popular types of real estate investments in our country. For example, let’s say you have a plot and you give that plot to a developer or builder company to build a multistorey building. In return you get money (according to the contract) and the ownership of a certain number of flats in that building. This is basically how a construction partnership is formed.
Advantages
- According to the agreement, you will get a large amount of cash and ownership of a certain number of flats.
- Projects under a good developer company tend to be well-planned, with every modern amenity and facility. As a result, you will be relieved from the concerns that usually need to be monitored during construction.
- There is less concern about the transparency and security of the property as the partnership is carried out through a series of legal agreements.
Risks
- It is a timely investment method because in many cases the builder company cannot finish the construction work within the proposed time frame.
- Since the apartment is built according to the design made by the developer company, the investor may feel left out of many things.
Private Equity Funds and Opportunity Zone Funds
Private equity funds are a type of real estate investment opportunity invented especially for accredited investors. A huge sum of money is invested in a private equity fund for commercial real estate development. A fund manager usually manages everything.
‘Opportunity Zone Fund’ is the most popular private equity fund in the real estate sector around the world. Although not yet common in Bangladesh, in foreign countries, richer citizens usually invest in the housing projects of the ‘Opportunity Zones’ certified and approved by the authoritative departments of the country or state. Opportunity zones are usually defined as low-income areas. And the money invested is used to improve housing facilities in these areas. The reduced property taxes actually incentivise the investors in these areas.
Advantages
- The security risk here is less than in other investment schemes as the project runs on state-sanctioned land.
- Reduced property taxes are a great opportunity for accredited investors.
Risks
- As mostly underdeveloped areas are considered ‘Opportunity Zones’, investors often have to face more difficulties in selling or renting out these properties.
- Investors also need to keep an eye on whether the ‘Opportunity Zones’ are improving livelihoods and infrastructural development or not.
A huge part of the economy of developed countries, such as Canada and India, are already dependent on their housing sector. In Bangladesh, the real estate sector is sturdier than any other sector and has the potential to change the entire economy of the country. There are already several types of real estate investments in our country. It is also expected that new types of investment methods such as house flipping, vacation home rentals, or crowdfunding will be introduced soon. There have also been a number of positive changes to the housing regulations in Bangladesh since the last budget which is expected to encourage new investors to invest in real estate.
