WHY TO INVEST IN REAL ESTATES?
By: Edy Laraque, B.Eng., MBA
Licensed Mortgage Broker
I. Criteria in planning your Investments
Nobody wants to loose the smallest portion of his hard earned money making bad investments. Therefore the most important criterion for all investors is the security of his investments. Secured investments allow investors to increase their wealth and prevent from loosing part of it.
Costs associated when making investments make it less attractive and may be a barrier in using the type of investments.
People invest their monies to increase their wealth. Investors may seek short-term or long-term profitability . The profitability of the investment types shall be carefully evaluated and be in accord with the personal objectives, of short-term return or long-term growth of capital.
Investors are more likely to use investment types they know and are familiar with. Improving the knowledge of the investment type betters the decision making of the investors when they have to make choices.
Security
Investments made in banking institutions are the most secured of all types of investments. Liquid assets, such as bank savings, CD's and bonds, are no-loss investments because they are guarantied by either the governments (federal to local), the institutions, or by highly profitable corporations. Real estate investments do not provide "free" security as experienced in liquid asset investments. Real estates investors must buy their own insurance to secure their investments and prevent losses in case of fire, floods and storms. Money and stock markets, due to their speculative nature have the lowest level of security among all types of investments.
Costs
There are practically no investment costs when investing in liquid assets at the local banks. Investments in money market have moderate brokerage costs. Closing costs and commissions are deterrent to enter in real estate investments. Unlike all other types, real estate investments require in addition, high maintenance costs of the properties, which include taxes, property maintenance and repairs. Brokerage and financing costs are high when investing in stock markets.
Short-term Profitability
When done wisely, investments in growth stocks provide the highest short-term profitability, followed by money market investments. Short-term profitability of real estates investments is reduced by the high closing costs associated with every transaction. Liquid asset transactions have the lowest short-term returns on investment.
Long-term Profitability
Real Estate investments are attractive because they have the highest long-term profitability followed by investments in stocks and money markets. Again investments in liquid assets have the lowest long-term returns on investment.
Knowledge
Transactions that take place in local banks are well understood by investors. People have a fairly good understanding of Real Estate investments, because the must have a lodging. Bond and stock markets require higher degree of sophistication from the investors.
Table 1.- RANKING of INVESTMENT TYPES by CRITERIA
From best types (on top in column) to least performing ones (at the bottom).
SECURITY
COSTS
Short-term PROFITABILITY
Long-term PROFITABILITY
KNOWLEDGE
Bank Savings
Bank Savings
Growth Stocks
Real Estates
Bank Savings
CD's
CD's
Money Market
Growth Stocks
CD's
Bond Market
Bond Market
Real Estates
Money Market
Real Estates
Real Estates*
Money Market
Stable Stocks
Stable Stocks
Bond Market
Money Market
Real Estates
Bond Market
Bond Market
Stable Stocks
Stable Stocks
Growth Stocks
CD's
CD's
Growth Stocks
Growth Stocks
Stable Stocks
Bank Savings
Bank Savings
Money Market
*Proper Hazard, flood and storm insurance required to secure investments.
II. Other Criteria of concerns
People planning to make investments shall also consider the following secondary criteria.
The smallest amount of cash can be invested in bank savings. However, real estate investments require the largest amount of capital among all investment types. In the present real estate inflationary times, investors shall be able to secure important financing to acquire properties.
Barriers to entry, like the credit score of investors, make real estate investments the least accessible type of investments. There is practically no barrier to invest in the other types.
Because it takes time to sell and close properties, real estate investments are the most difficult to be converted into cash (low liquidity ). Bank savings constitute the most liquid investment type among all. Stocks and money market certificates can be sold fairly quickly. Penalties prevent CD's and bonds from being sold easily.
All real estate investments provide monthly rental incomes (either paid by others or saved by investors occupying his property). The rental income shall exceed all costs (taxes, financing, insurance, maintenance and management) to give positive cash flows to investors. Real Estates give the investors the highest opportunities to generate revenues. Interests are regularly credited in bank and CD's accounts. Bonds and stable stocks holders receive annual dividends, while growth stocks are not likely to generate any stream of revenues to the investors.
Growth stock investments require the highest level of management skills and follow-up to improve the profitability of the investments. In real estate business, investors shall manage efficiently their investments: they shall develop purchasing strategies, keep their financing costs low and chose carefully the timing for purchases and sales. Liquid assets and bond markets do not require skills to manage the investments.
Table 2.- SECONDARY CRITERIA
From best types (on top in column) to least performing ones (at the bottom).
CAPITAL REQUIRED
BARRIERS TO ENTRY
LIQUIDITY
CASH FLOW revenues
MANAGEMENT
Bank Savings
Bank Savings
Bank Savings
Real Estates
Bank Savings
CD's
CD's
Stable Stocks
Bank Savings
CD's
Bond Market
Bond Market
Growth Stocks
CD's
Bond Market
Growth Stocks
Growth Stocks
Money Market
Bond Market
Stable Stocks
Stable Stocks
Stable Stocks
Bond Market
Stable Stocks
Money Market
Money Market
Money Market
CD's
Money Market
Real Estates
Real Estates
Real Estates
Real Estates
Growth Stocks
Growth Stocks
III. Conclusion
Real Estate investments allow the highest long-term returns on investment among all types of investments. Because most real estate investments provide revenues and cash flows (exclude pre-construction investments), real estate investments are very attractive. However, the security of real estates requires proper insurance coverage, which must be paid for by the investors. Management skills and capabilities are keys for success when investing in multi-unit rental and in commercial properties.
It is highly recommended to invest in Real Estates. Investors shall be highly concerned when choosing the financing partners and the real estate professionals to help them succeed. Careful planning and cost control is very important, because real estate investments are large in nature and the smallest mistakes may ruin your financial stability for long time.
LANDMARK
LENDING GROUP
1327 SE Second Ave
Fort Lauderdale , FL 33316
Cell. (786) 246-4533 Fax: (954) 484-3375