REAL ESTATE
REAL ESTATE MARKET
INVESTMENT
“Real estate cannot be lost or stolen, nor
can it be carried away. Purchased with
common sense, paid for in full, and
managed with reasonable care, it is about
the safest investment in the world.” -
Franklin D. Roosevelt, U.S. president
Many people today have the financial means
to go beyond relying just on real estate to
meet their basic needs. These people also buy
real estate as an investment, a producer of
value, and a repository of wealth that
symbolizes the transformation of their labor
into a material, priceless possession.
A real estate investment can be defined as a
person's financial commitment with the
goal of capital growth, preservation, and
profit.
A real estate investment occasionally needs
something just as significant as cash; it
frequently includes putting in time and effort
from one's own schedule. Sweat equity refers
to this hands-on approach to an investment.
Real estate investing refers to the purchase
of property as an investment to generate
income rather than using it as a primary
residence. In simple terms, it can be
understood as any land, building,
infrastructure and other tangible property
which is usually immovable but transferable
Some of the examples of real estate are a
house, office building, agricultural land,
commercial plot, etc. It is considered to be a
secured form of investment.
THE NATURE OF THE
CHARACTERISTICS
Each parcel of real estate is unique and thus
requires an individual investment analysis
relevant to its specific locational
attributes. All real estate does, however,
share some traits that influence its value,
they are:
Fixity- Real estate is fixed in location,
which greatly restricts the scope of its
marketability. As a result of this fruity, real
estate values are affected by any political and
economic activities occurring in the
immediate vicinity.
Longevity- Real estate is generally
considered to be a long-term investment
because of the durability of the
improvements and the permanence of the
land. This quality of longevity enables
investors to estimate, with some degree of
reliability, the present value of a future stream
of income from their properties.
Permanence-It is the attribute of
permanence that forms the basis for the
system of long-term mortgage-debt
amortization.
Risk- Real estate investment is a relatively
high-risk venture that reflects the
uncertainties of a somewhat
unpredictable market. In fact, there is no
readily identifiable, organized national
market for real estate as there is for stocks
and bonds.
Market segmentation- The real estate
industry also suffers from market
segmentation.
Besides these inherent characteristics of real
property, many government activities also
directly or indirectly influence property
values. Environmental controls and impact
studies add time and costs to the
development of land-costs that are inevitably
paid by consumers.
PURPOSES
To Preserve Capital
A primary reason for investing in real estate is
the preservation and possible
enhancement of the capital invested.
Generally, owners have enjoyed rising
property values over the years. A real estate
investment may build up additional equity
for its owner through reduction of the
mortgage debt.
To Earn a Profit
Fundamentally, all investors in real estate
seek a profit on the money they invest. By
definition, an investment of any kind is a
commitment of funds with the intention of
preserving capital and earning a profit. The
income stream from the tenants’ rents should
generate one kind of profit.
To Enjoy Tax Relief
Under the current income tax code, unlike
many other investments, the income derived
from rental real estate can be sheltered
substantially to diminish the income tax
liability and thus enhance the bottom-line
return. After all income from a rental
property is accumulated for the year, the
expenses incurred to develop this income
may be deducted, effectively sheltering this
amount from income taxes.
ADVANTAGES
The general advantages of investing in real
estate are
Income Tax Flexibility
Real estate allows its owner a high degree of
tax flexibility, due in large part to the
application of depreciation allowances
and the ability to deduct the premises’
operating costs from the gross income
collected.
High Degree of Personal Control
Real estate investments provide the
opportunity for a high degree of personal
control. Purchase terms can be designed to
reflect specific financial circumstances.
Often, rents can be arranged to anticipate
changes in future realty cycles.
Leveraging Opportunities
Although most lenders allow a purchaser to
borrow up to 50% of the value of securities
such as stocks and bonds.
Property Investment Buffers
Inflation
As the safety and security of real estate
investments are widely accepted, many
investors consider property investment as a
suitable hedge against inflation.
Historically, property price appreciation and
annual rental yield have consistently
outperformed inflation.
DISADVANTAGES
The disadvantages associated with real estate
investments include-
Relatively Poor Liquidity
Although real estate is usually easy to
purchase, it is sometimes difficult to sell,
with little certainty about the final sales price.
Unlike the stock and bond markets, where
there are almost always buyers to be found if
the price is low enough, sometimes real estate
cannot even be given away, let alone sold at a
reasonable price.
Large Capital Requirements
Contributing to the poor liquidity of real
estate income property are the relatively
large sums of money needed for property
acquisition, maintenance, and reserves.
Despite the high leveraging opportunities that
exist in this field, a sound investment must be
backed by adequate operating capital to
protect it in the event of unforeseen major
crises.
Necessity of Constant
Management
Everything about real estate, as in most other
areas of present-day living, is expensive. At
current rates for repairs, everyday
maintenance is costly, to say nothing of
required replacement of worn-out items. In
other words, a real estate investment requires
more active participation on the part of
the individual investor than do most other
investment opportunities.
Being a landlord
Most real estate investments require that the
property owner enter into personal
involvement with the professional
manager, the tenants, or both. These
interpersonal relationships, can also become
distressing, especially when a manager
must be dismissed or a tenant evicted.
WAYS TO INVEST IN
REAL ESTATE
Although many people think of buying a small
rental property when they think about real
estate investing, there are actually a lot of
different ways to get into the real estate
market. Each comes with risks and rewards,
and many are unique investment
experiences.
1. Land speculation:
Land speculation happens when you purchase
a piece of land with the intention of reselling
it, either whole or in parts. In some areas of
the country, you can own land but sell the
water rights or the mineral rights to other
entities such as mining operations or oil
and gas companies, land speculation is often
a short-term form of real estate investing
Because land speculation is generally about
being a middleman between land sellers
and land developers, there is a fair amount
of risk involved, especially if the interest in
property in your area starts to wane.
2. Property flipping:
Flipping is a type of real estate investment
where you purchase a revenue-generating
asset, mostly old properties that have the
potential of value appreciation through
renovations and remodeling. It is also
known as a form of wholesale real estate
investing in which investors don’t purchase a
property for themselves, instead, it is for
commercial purposes.
In a worst-case scenario, your flip house can
be converted into a rental property.
Property flipping is a western concept where
an investor buys an asset – generally, real
estate – and sells it quickly for a profit. The
concept is popular in western countries but it
is still finding its ground in the Indian
market.
3. Short-term rentals:
Any investment that lasts for 12 months or
less, is a short-term investment. A short-
term investment usually provides investors
with a higher rate of returns, but with a
higher risk. With short-term investments,
there is an equal chance of making money and
losing money.
4. Real estate investment
trusts (REITs):
A real estate investment trust (REIT) uses
the accumulated funds of its investors to
earn real estate income via diverse
properties as well as to create long-term
investments. A REIT is primarily an
income generator for a group of small
investors and is similar to the stock market’s
mutual funds.
It may be publicly traded, publicly non-
traded, or privately invested in. REITs give
the small investor the opportunity for
broad-based participation in real estate
equity investments, offering both regular
income from rentals and long-term gains
in property value as incentives. Unlike
other forms of real estate ownership, REITs
may not pass losses through to their
beneficiaries. Thus, their use as tax shelters
is limited.
Real estate mortgage trusts- A form of
investment that attracts participants who
prefer the benefits offered by real property
financing activities, a somewhat more
stabilized form of cash flow, rather than
the often-volatile activities of the real estate
equities market.
Hybrid trusts- Often REITs and REMTs are
established as interlocking trusts, with
the REIT dealing in property equities and
the REMT financing these investments.
5. Small-scale & Large-scale
residential rental
properties:
Some people choose to invest in real estate
by simply buying a few small residential
properties. A couple of houses or a duplex.
Unlike small-scale residential rentals,
larger-scale rental properties these are often
larger apartment buildings or housing
communities with a single owner or even a
portfolio of residential housing.
6. Real Estate Investment
Groups:
Small mutual funds for rental properties. If
you want to own a rental property but don’t
want the hassle of being a landlord, a real
estate investment group may be the solution
for you.
A company will buy or build a set of
buildings, often apartments, then allow
investors to buy them through the company,
thus joining the group. A single investor can
STAGES OF REAL
own one or multiple units of self-
contained living space. But the company
ESTATE INVESTING
that operates the investment group manages
all the units and takes care of maintenance, STAGE 1:
advertising, and finding tenants. In
The Identification Process- Where you invest
exchange for this management, the
often dictates the amount of returns you
company takes a percentage of the
receive. A strategic approach narrows your
monthly rent.
selection to one that is promising, here’s how
it works:
7. Real Estate Limited
Partnerships:
A real estate limited partnership (RELP) is
similar to a real estate investment group.

An experienced property manager or real

estate development firm serves as the
general partner. Outside investors are
then sought to provide financing for the
real estate project, in exchange for a share of
ownership as limited partners.

8. Real Estate Mutual Funds:

Real estate mutual funds invest primarily
in REITs and real estate operating
companies. They provide the ability to gain
diversified exposure to real estate with a
relatively small amount of capital.

Like REITs, these funds are pretty liquid. STAGE 2:

Another significant advantage to retail
investors is the analytical and research
information provided by the fund.
The Acquisition Process Now that you’ve
found a cash flow-producing property, you
need to acquire it— which brings us into the
second phase of real estate investing, the
Acquisition stage. Here are its steps:

Decide on Your Funding- Here are the most

common funding options for purchasing an
investment home:

Place Bid- Once you select your funding, you
have to handle all the documentation and
paperwork for your funding option.
Inspection and Analysis- When the bid is
accepted and make sure the property is still a
sound opportunity, by minimizing the
possibility of unforeseen issues, conduct an
inspection, appraisal, and evaluation by a
licensed contractor.
Closing- Complete all the necessary
paperwork to close the property in your name
and own the title.
STAGE 3:
Asset Management To get your rental rent-
ready and generating cash flow, you need to
perform the following tasks to get tenants in
place:
Renovation- Since you will be using your
investment as a rental for tenants, the
primary goal of renovation is to stay within
budget, while also attracting tenants. By
making well-defined, strategic renovations
you can do both.
Marketing- After renovation, you need to
quickly market your property to find quality
tenants. Here are some tips to generate
applications:
1. Hire a professional photographer to
take photos for your listings
2. Write short, descriptive copy in your
rental ad that illustrates the benefits to
the renter
3. Post your rental on multiple listing
sites
Tenant Screening- Once you have applicants,
you need to screen them properly to ensure
you find quality tenants who will pay on time
and treat the property as if it was their own.
Here are some guidelines: 1.
1. Require renters to fill out an
application and meet your determined
criteria
2. Run a credit & background check on all
applicants
3. Require documentation to validate the
applicant has the resources to pay
every month
Leasing- Once you’ve accepted an applicant,
require them to sign an annual lease and walk
them through the property. By being on-site
or having someone there on your behalf, you
can hand the keys over, verify the condition of
the property before move-in, and answer any
questions.
AVOIDING COMMON
PITFALLS
Avoiding real estate’s many pitfalls is key.
Otherwise, you’ll lose time, money, and
patience in the process — and that type of
exasperation can be a lot to overcome. Here
are some examples of how first-time real
estate investors often take the wrong course
of action:
Failing to consider the full range of
costs-
Typical expenses include vacancies and
repairs, as well as HOA, taxes, and insurance.
If you don’t account for all the costs, then
your projected returns will be much lower
than you anticipated.
Chasing the highest yield-
The highest-yield properties typically
come with the highest risk, like more
repairs, tenant turnover, and vacancy.
Limiting yourself to only investing in
your surrounding area-
Areas outside your current location may
provide higher returns and lower initial
investments. It’s important to look across the
nation for the best real estate investment
opportunity.
SUMMARY
Despite all these obstacles, real estate
investors continue to seek profitable projects.
Attempting to anticipate demand and, in some
areas of this country, actually creating
demand by the very design of their projects,
real estate developers are: adjusting the sizes
of homes; rethinking the frills in office
buildings; providing the magnetism necessary
to attract customers to shopping centers; and
creating new concepts in planned unit
developments, manufactured-home parks,
office parks, and industrial parks. All of this is
in an effort to bring a usable product to a
receptive market.
The measurement of a property’s value is a
function of its utility, its ability to generate
income in the future, and its position in a
spectrum of alternative investment
opportunities.
REAL ESTATE
FINANCING
Real Estate Finance means borrowing and
lending. In this position it can be seen in two
points of views. Subsequently it would be an
investment for who lend the loan and on the
other hand it would be a liability for who get the
loan as a financial support. This transaction
would not be a trivial activity as we seen.
Because there is a huge responsibility and also a
risk for the both parties that it mentioned
above. In real estate financing it has an accurate
and massive process. In this process it can be
identified some of key areas.
MAJOR ASPECTS OF REAL
ESTATE FINANCING
 Analyzing the effects of financing
 The valuation of mortgages
 The primary and secondary mortgage
markets
 The securitization of mortgages
 The financing of residential and
commercial real estate
 The changes in tax laws affecting real
estate financing
In real estate financing it should obtain the
financial support in an accurate way. In that
case it should analyze the effects of the
financing way that hope to obtain that support.
Especially that way should be trustworthy and
after the procurement there would be a good
management system to carry out it further.
WHY DO WE NEED FINANCE?
As it discussed above finance side is essential
for the success of the real estate and other
vice it could not be carrying out the project
further. So, the real estate would be depended
on commercial investment organizations or
mortgage banks for their dependency.
Real estate finance is required for,
 Land Acquisition
 Construction
 Operational expenses
 Cost of Capital
When considered about the above-mentioned
facts the operational expenses show major
aspect of that real estate financing. Hence it
contains lot of inner facts in it, like
 Real estate taxes
 Insurance
 Utilities
 Repair and maintenance
 General and administrative
 Management
 Salaries
This in fact needs a good financial support to
fulfill above particulars. Thus, the investment
should be strong and it must be considered
under analyzing of the effects of financing.
And the other payments like insurance and
salaries also need a good financial support for
maintain them without arrears, because it has
acted the role of security and dependency.
SOURCES OF FUNDING
The sources available in financial market can
be identified under the several groups or the
categories. Like follows;
1. Long-term sources & the short-term
sources
2. Internal sources & the external sources
3. Primary sources, financial middlemen,
other sources and the secondary
mortgage market.
However, describes the sources of finance
for real estate development under the
category of long-term sources & short-
term sources.
Long Term Sources of Financing
1. Equity Capital- Equity capital is the
most common long-term source of
finance in the finance market & the
equity capital is unit value of the share
capital of the company. Equity capital
can come from real estate development
in different forms
 A contribution personal savings or a
cash contribution
 A contribution in kind, such as
equipment and material still own
 A combination of cash contributions
and contributions in kind
 A contribution in cash or in kind
from company associates or
shareholders
 Financing from a reserve (self-
financing)
When investing equity capital to real
estate development it has lot of
advantages to the shareholders as
well as real estate developers.
2. Preference Shares- Preference shares
are the one of long-term real estate
financing sources of the world. It has a
fixed percentage dividend before
any dividend is paid to the ordinary
shareholders.
3. Debentures- A document under the
company’s seal which provides for
payment of a principal sum &
 interest thereon at regular intervals,
which is usually secured by a fixed or
floating charge on the company
property or undertaking & which
acknowledges a loan to the company.
4. Bond- The bond is the long-term debt
agreements issued by governments,
corporations, & other organizations.
This types of sources of financing can
use for the government related real
estate projects.
5. Retained Profits- Retained profit
implies investing past profits. In such
case, past earnings can be retained
or reemployed as new capital for the
real estate development company.
These sources of finance can use only
for the previously completed projects
which engaging the profit earning
stage.
Short Term Sources of Financing
1. Short Term Loans - When company
need cash for a short-term emergency
or when there is a need for liquid cash
short term loans is the most
suitable source of financing. Short
term loans are provided depend on the
creditability of the company.
2. Trade Credit- According to the small
business encyclopedia define trade
credit as an arrangement to buy
goods or services on account, that is,
without making immediate cash
payment. It is an essential tool for
financing growth. Trade credit is the
credit extended to by suppliers who let
buy now and pay later.
3. Factoring- Factoring is a financial
transaction between a business
owner and a third party that
provides instant cash to the former
in exchange for the account
receivables of the business. In other
words, a cash-strapped business,
unable to get desperately needed
funds, sells off its invoices, that are
called account receivables, to a third
party and in exchange, gets the much-
needed cash.
SUMMARY
The funds for financing real estate emanate
from savings, both personal and corporate.
These savings are held in the form of deposits
in banks and savings institutions, and as
premiums paid for life insurance policies and
into retirement and pension funds.
Basically, the funds for financing real estate
investments originate from the financial
institutions in this country—the banks,
savings associations, and life insurance
companies. Either directly or through their
correspondent mortgage bankers or
representative mortgage brokers, these
intermediaries provide most of the monies for
short-term construction or home
improvement loans; owner-occupied, single-
family home mortgages; and large-project,
long-term financing, respectively.
RIDDHI PIROGIWAL, 08