Invest in Real Estate without Purchasing an Expensive House.

November 4, 2020, ZEXPRWIRE, The housing is placed back as a favorite in the investment strategy of many Spaniards. The prices of sale in the real estate market continue to rise, in the same way that the figures in the amounts of rents do. Gone are the ghosts of the real estate bubble and that year 2015 in which house prices in world hit minimums. Since then, property values have risen almost 13%, according to the Capital Smart City.

These figures are also added to the rental boom, which once again exceeded its historical maximum for the seventh consecutive quarter and making 25 provincial capitals in June with rents at their historical maximum, according to Idealista.

With all this, it is not surprising that real estate investors see again in housing the attractiveness that it had lost in recent years, especially if we take into account that gross rental profitability reached 10.7 in the first quarter of the year % (3.9% without taking capital gains into account). However, if the real estate bubble has taught us anything, it is that neither past returns are guaranteed nor is there a risk-free asset in the market.

Therefore, when thinking about whether or not to invest in housing, in addition to assessing its advantages and disadvantages , it is convenient to know that there are other options on the market if we want to direct our investment towards the real estate world.

At Blue World City we review some of the best alternatives that are still linked to this sector, may be more interesting for some of you. Of course, it is convenient not to forget that each investor profile is different and that, if we are not clear about it, it is best to have the figure of a financial advisor to guide us according to our needs.

Let’s get started

Skymarketing does not provide financial advisory services, it simply puts you in touch with the companies that provide it. For more information, consult the general conditions of use.

Advantages and disadvantages of buying a house to rent

Before getting carried away solely by the profitability that investment in a rental home can generate at this time, we will have to study the advantages and disadvantages it offers:

Advantage:

Profitability.

Although, as we have already mentioned, past returns do not guarantee future returns, it is clear that the real estate market is enjoying a good time from an investment point of view. According to the latest data from the Bank the average gross profitability stands at 10.7% (taking capital gains into account), a figure almost two percentage points higher than, for example, 2016.

Physical good.

Another advantage that the home offers is that it is a tangible asset, which provides emotional security to the investor. Therefore, even in times of risk or panic in the markets, if this asset loses value or does not offer the expected return, it will not be as negative for the investor as if they saw the value of their money on the stock market or other assets collapse.

Tax relief.

When buying a house to rent, another positive point is that the owner can deduct up to 60% in personal income tax. This deduction, of a state nature, may be added to that offered by certain autonomous communities to compensate, for example, interest on loans or credits requested for the improvement of the property, expenses for repairing and maintaining the home or amount of insurance premiums, among others.

Disadvantages:

Lack of liquidity.

One of the main disadvantages of a home is that it is an illiquid asset. Therefore, if we need to have the money immediately, we will not be able to do so and, depending on the city we choose, if we sell the property we will need more or less time. According to the latest data from the company, the average sale time of a home in Spain is 8.2 months.

Little diversification.

Investing in a property can be playing everything to a card and it cannot always go well. Depending on the area we choose, we will obtain more or less profitability. However, in the long term it is very difficult to foresee how prices will evolve in certain areas. And it is that, while some areas become fashionable, others stop being attractive. Therefore, if it is chosen poorly and we only have one asset, there is little chance of recovering and making that investment profitable.

It requires periodic reinvestments.

Another negative point of investing in housing is that it carries a series of associated expenses. In addition to taking charge of municipal taxes or repairs if damage occurs, the owner will be forced to reinvest from time to time in the property to keep it in perfect condition and be able to take advantage of its profitability.

Alternatives to buying a home

Although investing in a property can be an interesting option at this time if we take into account the gross profitability of the rental, we will always have to choose the city and the area to invest very well if we do not want our investment to generate losses in terms of profitability. And it is that not always the best alternative to invest in real estate has to be the home. In the market there are different alternatives that may be more interesting depending on our investor profile .

Invest in real estate mutual funds

One of the best alternatives for those who want to have a presence in the real estate sector in their portfolios are investment funds . Investment in this sector can be carried out in two ways: one of them is funds that invest directly in real estate assets for rental and that, therefore, do not follow the same trend as the rest of financial funds. The other way is based on the investment of indirect real estate funds, which select securities that are related in one way or another to companies in the real estate sector.

One of the advantages that real estate investment funds provide is the diversification of the portfolio, since it allows to be positioned in different assets in different parts of the world at the same time, a considerable advantage compared to the purchase of a property, since it means having to gambling everything practically to a card and trusting that the area we have chosen is profitable.

Regarding direct real estate funds, the behavior is less positive for the moment. Currently, at a general level they offer an average annualized return of 0.45% over three years and record losses close to 40% over five years.

Invest in companies

Another of the options that exist within the real estate market are the Socimis , which are listed companies that base their business on the purchase, promotion and rehabilitation of urban assets that are usually used for rent. Socimis are a collective investment vehicle between funds and real estate companies that allow their participants to be present in the housing market without having to bet all the money on a specific asset (a property) and without being conditioned due to its lack of liquidity. It is a format based on the famous REITs (Real Estate Investment Trust) born in the US in the sixties.

For a company to be considered a Socimi, it must have at least a portfolio of properties (which can be homes, offices, commercial premises, warehouses …) 80% destined for rent. Likewise, they have the obligation to pay their shareholders annually, distributing 80% of the dividends they obtain through rental income , 50% of the profit from the sale of real estate and 100% of that obtained through dividends for participation in other Socimis.

This last point is interesting especially for those investors who invest in the real estate market looking for periodic income, since these can be achieved, for example, through dividends and not necessarily by buying a home to rent it.

Currently, in the real estate market there are more than 1000 Socimis that are listed on the continuous market and on the Alternative Stock Market (MAB). Among the largest, Merlin Properties and Colonial stand out, registering increases so far this year of 15% and 21%, respectively.

Invest in real estate crowdfunding

In recent years, new forms of investment have also become popular. One of them is known as crowdfunding, which allows investors to collectively finance business projects through small capital contributions with which they obtain shares in the company in exchange.

One of its variants is real estate crowdfunding, which works as a system of small investments focused on the real estate sector through platforms that are in charge of selecting and executing those investments. In general, these platforms buy real estate in large cities that they reform and later sell on the market. 

However, to obtain financing, a limited company is usually created once the project in which you want to invest is identified. In this way, it is in this society in which the investor deposits his participation and, once the profits are generated, the platform is in charge of distributing them among its investors.

Among the best-known real estate crowdfunding platforms on the market we find Skymarketing, which record average returns for projects above 10% . Although it is an investment formula that anyone can access. It is a method that involves significant risks for the investor, so it requires a careful analysis of the project in which it is invested.

And it is that investing in real estate, even without doing it directly in housing, implies a series of risks that it is important to know if we do not want to risk all our assets. Therefore, if we do not have sufficient financial knowledge and we want to be present in this sector, it is best to have the help of a financial advisor who prepares a personalized investment plan based on our objectives.

With your permission. In my modest understanding, brick, more than an investment, is an excellent business for those who already have capital and can afford to risk it in the purchase / sale of real estate.

Buy to rent if it is a form of investment, but also reserved for those who already have a good figure (and not suitable for those who want to start making their money profitable. 

And be careful with mortgaging to invest in real estate. Human beings usually stumble several times on the same stone, or rather, on the same brick.

With regard to investing in real estate funds and in view of the article, it does not seem that they show interesting returns.

And finally, the socimis and crowdfunding. These options are still a loan to third parties to see how they manage my money, in exchange for returns that, as I see in the article, are between 2% and 4% (without entering expenses, taxes, etc.) No, It seems like no bargain.

As I have already mentioned, regardless of the bargains that some experts (or vultures) in the real estate sector can get taking advantage of the misfortune of others (crisis, evictions, foreclosures), the following will be normal.

So far, more or less acceptable, but please do not fall into the error of taking a mortgage to invest in real estate. We already know the consciences of that practice.

In short. If you have pasta and a crystal ball, buy real estate when it’s cheap and sell it when it’s expensive. That’s fine.

But if this is not your case, in the insurance sector we have more interesting investment solutions