Exploring Real Estate Investments, What Is Real Estate?
The term real estate’s meaning is "an interest in land". If I widen the definition, the word "interest" can mean either an ownership interest and also it is known as a fee-simple interest or a leasehold interest.
In an ownership interest, the investor can avail full rights of ownership of the land. For example: to legally use and transfer the title of the land or property and should also assume the risks and responsibilities of a landowner. Any losses as a result of natural disasters and the obligation to pay property taxes is under ownership interests. The second side of the relationship is, a leasehold interest only exists when a landowner agrees to give some of his rights to a tenant in exchange for a payment of rent. If you rent out a property, then you have a leasehold interest in real estate. If you buy a property, then you have an ownership interests and rights in that home.
As a real estate investor, it is highly recommended to purchase an ownership interest and then earn a return on that investment by issuing leasehold interests of tenants. Tenants will in return pay you rent. It is also common for an investor to acquire a long-term leasehold interest in land. Then construct a building upon it. But, at the end of the land lease, the land and the building become the property of the bona-fide land-owner.
Private Market Vs Public Markets
When you are in the phase of planning to invest in real estate, one of your first and most important tasks is to take a decision. What kind of exposure to the real estate market is good for your situation? Different exposures produce different level of risks and returns. Your choice will also influence the modes by which you will acquire the real estate property.
The first type of market you can participate in is the private market property. In the private market, you would be able to purchase a direct interest in one or more real estate properties. In the private market, you would be able to own and operate the piece of real estate property yourself or through a property manager. You would receive the rent and value changes from that investment. For example: if you were to purchase an industrial building that was leased to one or more tenants who pay you rent, it means you are participating in the private real estate market.
The public real estate market is a little bit different. You are participating in the public market if you purchased a share or unit in a publicly traded real estate company. The common example is a Real Estate Investment Trust (REIT). If you purchase a real estate security, it means you are investing in a company that owns real estate properties and manages it on behalf of the shareholders or unit-holders of the company. Aftermath, your exposure to the real estate market is more indirect in the public real estate market.
Debt Investment and Equity Investments
Choosing your investment is also very important in real estate investment. Debt investment means, you are lending funds to an owner or buyer of real estate. You receive periodic interest payments from the owner and a security charge against the property in the form of a mortgage, if you do debt investment. At the end of the mortgage time period, you get back the balance of your mortgage amount. This type of real estate investing is much like purchasing of bonds.
An equity investment specifies a residual interest in the property. When you are an equity investor, you are the owner of the property. In equity investment, you gain a lot when the property value increases. You are able to get more rent for your property. But, if the terms would go wrong, such as, all your tenants vacate the apartments and you cannot make your mortgage payment. Then the mortgagee, who has a keen interest in your property, may foreclose and you have to forfeit your equity position to satisfy their security. It clearly shows, the risks of an equity position in real estate is much like that of owning stock.