Some financial aspects of real estate and property investments

Real estate or real estate are not considered truly liquid investment instruments since individual real estate or real estate is not interchangeable. Therefore, identifying land or real estate to invest in can require a great deal of time and effort, and much depends on how familiar investors can become with the particular segment of the market that corresponds to their interests. Real estate or land investors often use a variety of appraisal methods to make life a little easier by comparing prices. Sources of information regarding prices may include: public auctions, private sales, public agencies, market listings, or real estate agents.

Real estate or land assets are much more expensive than bonds or stocks. Therefore, investors often turn to a mortgage loan that can be secured by land or real estate. Consequently, we usually use the terms * equity * or * leverage * with reference to the money paid by the investor as opposed to the slow amount by the bank. Their relationship is called loan-to-value (LTV), which is considered to represent the risk assumed by the investor. Most banks consider 20% of the appraised value as a minimum capital requirement. A lot of pension funds and REITs, or Real Estate Investment Trusts, regularly buy land or real estate with * zero * leverage, thus minimizing their risks, but also limiting their Return on Investment (ROI).

If the purchase of the land or real estate is leveraged, the required monthly fees or “maintenance costs” could create negative cash flow for the investor immediately after the purchase. In addition to the possible positive elements of cash flow, such as those generated by depreciation, capital accumulation and capital appreciation, investors could also partially or fully offset “maintenance costs” through so-called net operating income or NOI. . This technical term generally means * rent less expense * and in countries other than the US It is often referred to as net cash flow. The * NOI / purchase price * ratio is called the Capitalization Rate. Indirectly indicates in how many years the property or real estate will be amortized in an interest-free financial environment.

For example, if an investor has purchased land or real estate for $ 800,000, generating a positive net operating income of $ 40,000 per year, then the property’s capitalization rate is 5%. It shows the investor that ownership of the land or property will pay off in 20 years in terms of net cash flows.

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