You can invest and own real estate in many different ways. This can be through the purchase of a property, the purchase of shares in real estate companies or the purchase of units in real estate funds.
So, how do you get into real estate?
Are you considering investing in real estate? Then you first need to decide which form of investment is best for you. For example, you can invest in real estate by buying shares in real estate companies or units in a real estate fund, joining a crowdfunding project or buying a rental property. Each form of investment has its specific risks and benefits. You must decide for yourself what risk and commitment you want to take.
Invest directly in real estate
When we talk in everyday speech about investing in properties or about becoming a property owner, we usually mean buying a rental property.
Purchase and ownership of properties can take place in different ways.
For example, you can own a rental property privately and directly as a private person, in a sole proprietorship, limited liability company or other types of companies.
How you own the property affects, among other things, financial accounting and taxation.
Start by researching the real estate market
Like buying or renting a private home, property ownership is about finding a suitable property. Therefore, start by researching what the real estate market or markets you are interested in look like.
What objects are out? What condition are they in? What do they cost? All to give you an idea of what the market looks like and works.
Count on your investment and compare
Once you have found one or more suitable items, start by counting on your investment. What income does the property have?
How high are the operating costs? How big are the expected maintenance costs? How high are taxes and fees?
Then compare your different items.
Property ownership requires a long-term perspective and involves taking responsibility
Property ownership is a long-term business. Real estate investments require large financial resources that make long-term plans for amortization and interest payments necessary.
As a property owner, you also have a responsibility for your tenants, regardless of whether they rent a home or a room, have a good standard.
Therefore, long-term plans for operation and maintenance are necessary for the property to be in good condition throughout its life and for your tenants to have a good standard.
Property ownership also means a requirement for commitment in the property but mainly in your tenants.
What do I need to know to invest in real estate?
Now this will of course be subjective and colored by my own experiences and reserch, so take it with a pinch of salt.
This list is primarily for you who want direct management, but what I would recommend is the following:
- Be able to interpret and read floor plans / detailed plans
- Understand how valuations of properties are carried out and what methods are available for valuations.
- You should have a good idea of the basic PBL (plan and building law) and also BBR (Boverket’s Building Rules)
- Calculate on simpler renovations on an overall level
- Keep an eye on which grants are available to apply to the National Board of Housing, Building and Planning and other government agencies.
- Understand how loans work and what type of loan you should strive for, preferably in combination with good relations with the bank.
- Be able to make simpler inspections of properties prior to an acquisition.
Now this may sound a bit bulky and it is not the case that you need to be a professional in all of the above.
On the other hand, I think that there are such huge pitfalls to fall into if you have no competence in the above – so then you should refrain from investing.
Another possibility is of course to buy the expertise in the form of hiring a consultant to solve the specific task.
The question, however, is how sustainable it is in the long run if you are to evaluate many objects.
BE ABLE TO INTERPRET AND READ PLAN MAPS / DETAIL PLANS
The reason I bother a bit about this is because it is so incredibly important and basic in all types of property ownership.
You can have customers who do not know that they are sitting on a building right that is worth 5 million on their property.
Unfortunately, the opposite can also all too often be true.
They have bought a property where they are simply not allowed to build what they intend.
So get a basic understanding of how to read a floor plan.
Here is a clip I found with some simple instructions:
Understand how valuations of properties are carried out and what methods are available for valuations.
Now it is not the case that you need to know exactly how the local price method works or other valuation methods exactly.
What I am trying to get across here is that you should have a look at which factors increase the valuations in order to be able to quickly increase the value of the property you bought to reduce the loan burden.
Here are some tips:
- Check the detailed plan if there is more building rights, what is it worth?
- Is there a lease? Then make a new use value valuation when you have renovated “just right”.
- Compare with the municipal housing company and other landlords, is there room to increase the rent?
- Is it possible to agree with a company or municipality to rent out certain parts to them? Sheltered housing is often also interested in smaller landlords and often generates high income.
You should have a good idea of the basic PBL (plan and building law) and also your countries building rules
This may be a bit much requested but the reason I want you to have an opinion is because you should have an understanding of what extensions / conversions you can do to increase the value of the property.
It is also important to have an idea of fire protection requirements and the like in order to actually even be able to determine whether it is reasonable to furnish another apartment.
The same applies to accessibility requirements in apartment buildings.
Calculate on simpler renovations on an overall level
What I mean is that you should have an idea of the price level for different types of measures per square meter.
Say that the whole apartment needs to be plastered, painted and tiled and if you then have some standard values in your head, you will quickly find out that it will be around $70 per sqm and the apartment is 72sqm, so you can quite easily find that this particular apartment will cost $5400 to get fresh.
So a tip is to calculate your own sqm prices once you get started so you follow up your costs. Before you start getting started with the first project, I recommend that you check sqm prices on the internet to have an idea.
Once you have been holding on for a while, you will have a very good idea of what each measure will cost you. Then it will be incredibly much easier to find “good items”.
Keep an eye on which grants are available at different government agencies
This is much more important than you think, if you are the one who knows what grants are available to apply for, you can be the one who manages to get a valuation of a property at twice the value of what your competitors succeed with.
Here it is important to keep track of investment grants for rental apartments, if there are grants for solar cells.
Maybe it is possible to turn some apartments into student housing?
Especially if the availability is tricky to solve.
This can be one of the most important points that unfortunately many people lack knowledge about, so try to keep track of what contributions are in progress, it can be the difference between a good project and an absolutely fantastic chapter.
Understand how loans work and what type of loan you should strive for
I think this is pretty obvious to most people, we want to make money with other people’s money. This is a bit of the basis for why properties get a fantastic leverage effect.
This is also personal preference, if you are a person who prefers to pay off the loan and has a 40% loan-to-value ratio to feel safe – it also works great.
On the other hand, if you want maximum effect and frequency in your acquisitions, you should strive for as high a valuation as possible with as low a share of equity as possible in order to have available capital to make new acquisitions.
It is simply not worth paying off a loan when the interest rate is as low as it is today if you instead have the opportunity to invest and make money with the bank’s money.
Now this is really a truth with modification, this is clearly risky and should only be done with money you can afford to lose and you should be completely clear on what you are doing.
However, this is what so many of the large property owners do to constantly have the opportunity to invest in new properties. It is difficult to “save” 500 apartments from 0.
Be able to make simpler inspections of properties prior to an acquisition.
This goes without saying. We need to have a certain basic understanding of critical elements and costly measures to be able to make a really good investment in a property.
Are these settlements basically? Does it need to be stabilized?
This can cost a fortune. Is it built with blue concrete? So all possible renovations that need to be done will be much more costly as completely different certificates and methods are required to work with the material.
Here you can of course list as many examples as you like, but I also think this is the point where most people will choose to buy skills and bring an inspector before the purchase.
How can I increase the value of a property in the short term?
Note that I do not mean that the value decreases immediately after, but here are my suggestions on how to quickly increase the “value” of the property:
- Raise rents (simple but true)
- Value in use (so you can raise rents)
- Renovation of surface layers that increase the above use value valuation.
- Look at the detailed plan and point out values that did not appear in the valuation. (here can be a lot of value to pick up)
- Change use of a room to an apartment (if BOA is valued higher than LOA, which is often the case)
- Decorate an attic apartment (if it is reasonable)
Should I invest in real estate funds or stocks?
Yes, you should if you are not completely comfortable with what I have discussed above.
In short, if you are ready to learn and are passionate about it, I absolutely think you should invest in real estate.
If you do not really have the time and energy, I still think you should invest in real estate – but in the form of a really good real estate fund!
Real estate investing is sometimes seen as something magical and overwhelming.
Many GetRichQuick gurus market hard real estate as the path to success and the ultimate passive income. The way I want to do business, real estate fits very well into my vision.
But it really is not something for everyone.
Ownership means responsibility. If you are not prepared to take that kind of responsibility, you do better in investing your money on the stock market.
A property is a business. Even if the income is passive in itself, a company is never passive – it requires constant love to thrive!