Real estate investing

Buying and selling real estate for profit

Real estate investing involves the purchase, management and sale or rental of real estate for profit. Someone who actively or passively invests in real estate is called a real estate entrepreneur or a real estate investor. Some investors actively develop, improve or renovate properties to make more money from them.

During the 1980s, real estate investment funds became increasingly involved in international real estate development. This shift led to real estate becoming a global asset class. Investing in real estate in foreign countries often requires specialized knowledge of the real estate market in that country. As international real estate investment became increasingly common in the early 21st century, the availability and quality of information regarding international real estate markets increased. Real estate is one of the primary areas of investment in China, where an estimated 70% of household wealth is invested in real estate.

Real estate is divided into several broad categories, including residential property, commercial property and industrial property.

Real estate markets in most countries are not as organized or efficient as markets for other, more liquid investment instruments. Individual properties are unique to themselves and not directly interchangeable, which makes evaluating investments less certain. Unlike other investments, real estate is fixed in a specific location and derives much of its value from that location. With residential real estate, the perceived safety of a neighbourhood and the number of services or amenities nearby can increase the value of a property. For this reason, the economic and social situation in an area is often a major factor in determining the value of its real estate. Property valuation is often the preliminary step taken during a real estate investment. Information asymmetry is commonplace in real estate markets, where one party may have more accurate information regarding the actual value of the property. Real estate investors typically use a variety of real estate appraisal techniques to determine the value of properties before purchase. This typically includes gathering documents and information about the property, inspecting the physical property, and comparing it to the market value of similar properties. A common method of valuing real estate is by dividing its net operating income by its capitalization rate, or CAP rate. Numerous national and international real estate appraisal associations exist to standardize property valuation. Some of the larger of these include the Appraisal Institute, the Royal Institution of Chartered Surveyors and the International Valuation Standards Council.

Real estate properties may generate revenue through a number of means, including net operating income, tax shelter offsets, equity build up, and capital appreciation. Net operating income is the sum of all profits from rents and other sources of ordinary income generated by a property, minus the sum of ongoing expenses, such as maintenance, utilities, fees, taxes, and other expenses. Rent is one of the main sources of revenue in commercial real estate investment. Tenants pay an agreed upon sum to landlords in exchange for the use of real property, and may also pay a portion of upkeep or operating expenses on the property. Tax shelter offsets occur in one of three ways: depreciation (which may sometimes be accelerated), tax credits, and carryover losses which reduce tax liability charged against income from other sources for a period of 27.5 years. Some tax shelter benefits can be transferable, depending on the laws governing tax liability in the jurisdiction where the property is located. These can be sold to others for a cash return or other benefits. Equity build up is the increase in the investor's equity ratio as the portion of debt service payments devoted to principal accrue over time. Equity build up counts as positive cash flow from the asset where the debt service payment is made out of income from the property, rather than from independent income sources. Capital appreciation is the increase in the market value of the asset over time, realized as a cash flow when the property is sold. Capital appreciation can be very unpredictable unless it is part of a development and improvement strategy. The purchase of a property for which the majority of the projected cash flows are expected from capital appreciation (prices going up) rather than other sources is considered speculation rather than investment. Research results that found that real estate firms are more likely to take a smaller stake in larger assets when investing abroad (Mauck & Price, 2017).

Some individuals and companies focus their investment strategy on purchasing properties that are in some stage of foreclosure. A property is considered in pre foreclosure when the homeowner has defaulted on their mortgage loan. Formal foreclosure processes vary by state and may be judicial or non judicial, which affects the length of time the property is in the pre foreclosure phase. Once the formal foreclosure processes are underway, these properties can be purchased at a public sale, usually called a foreclosure auction or sheriff's sale. If the property does not sell at the public auction, then ownership of the property is returned to the lender. Properties at this phase are called Real Estate Owned, or REOs. Once a property is sold at the foreclosure auction or as an REO, the lender may keep the proceeds to satisfy their mortgage and any legal costs that they incurred minus the costs of the sale and any outstanding tax obligations. The foreclosing bank or lending institution has the right to continue to honor tenant leases (if there are tenants in the property) during the REO phase but usually, the bank wants the property vacant in order to sell it more easily.

Buy, rehab, rent, refinance (BRRR) is a real estate investment strategy, used by real estate investors who have experience renovating or rehabbing properties to "flip" houses. BRRR is different from "flipping" houses. Flipping houses implies buying a property and quickly selling it for a profit, with or without repairs. BRRR is a long term investment strategy that involves renting out a property and letting it appreciate in value before selling it. Renting out a BRRR property provides a stable passive income source that is used to cover mortgage payments while home price appreciation increases future capital gains. The phrase was slightly updated in a 2022 Bloomberg News article noting that BiggerPockets added "Repeat" to the end, making it “BRRRR” to describe a real estate investing strategy of Buy, Rehab, Rent, Refinance, Repeat.

According to Lima et al. (2022), in Ireland, the financialization of rental housing, which includes the entry of institutional investors into urban rental housing markets, contributed to structural factors that create homelessness, directly, by worsening affordability and security in the private rental market, and indirectly by influencing state policy. It was found that the history, politics, and geography of the REITs cause the collapse of Irelands market (Waldron, 2018).