Real Estate Investing
Real estate is a good investment vehicle. Real estate is closely correlated to the level of interest rates and inflation. Real estate is inversely correlated with long-term interest rates. When interest rates rise which generally occurs during strong economic environments, real estate weakens. On the other hand, when interest falls which occurs during economic recessions, real estate strengthens. Housing starts is a coincident economic indicator which has historically fell during economic booms and recovered during economic busts.
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Real estate Investing characteristics
Return on capital
A well-managed real estate investment can generate 30-percent return on capital.
Real estate has certain characteristics which need caution. Firstly, real estate is the least liquid investment.
Real Estate ideal deal
The ideal real estate investment should have the following criteria:
- A problematic asset which can be fixed
Investing in real estate can generate extraordinary returns if it is handled properly. The value is hidden in real estate which isn’t in use, is old and in bad shape cosmetically, located in mid to low quality areas. Purchasing these real estate properties and refurbishing them can generate substantial returns.
- A strong asset enduring short-term challenges
- A motivated seller with cash flow or other issues
- Purchase assets after recessions, in the low part of the cycle
- Change the function of an asset to generate higher yields
In the past 50 years, London real estate has experienced a boom due to high population growth and lack of supply. There were many commercial buildings which were converted to blocks of flats and could be either sold or rented out. Low interest rates were the ideal environment to finance such projects.
- High gross yields
Real estate properties can generate a gross yield of 6-8 per cent.
Between 2009-2011 UK commercial real estate dropped in value by 80%. This was a very good investing opportunity, which produced a capital appreciation of 30% in a matter of 2 years.
Leverage in real estate investing
Leverage in real estate investing must be used prudently. 60-70 per cent is normal leverage.
Real estate values and inflation
During the deflationary periods of the great depression between 1925 and 1935 real estate values plunged together with stock prices. During the inflationary period of the 1970s real estate values peaked along with inflation.
Real estate values and interest rates
Historically, during the 1930s real estate values coincided with falling interest rates. However, during the 1970s rising long-term rates didn’t prohibit real estate values from rising. The inflationary forces were stronger than the dampening force of rising interest rates. Hence, it may be concluded that historically real estate prices are more correlated with the level of inflation than interest rates trends.