Why do investors continue to buy real estate?

In an improving economy, investors would have a wide array of products to invest in. Yet despite the numerous options, many still consider real estate as their preferred choice.

Let us understand their main reasons.

1. Tangible asset base. Most real estate assets are physical properties. Other than vacant land and serviced lots, real estate assets include residential developments such as houses, apartment units, and condominium units. In addition, commercial and retail assets include offices, regional malls, neighborhood shopping centers, standalone shops, etc. Hospitality, entertainment and gaming projects consist of hotels, resorts and lodges, events places, theme parks, casinos, etc.  

These tangible assets can be managed directly and provide investors with more control, unlike stocks and securities which are highly volatile and usually administered through intermediaries.

2. Respectable rate of return and growth opportunities. Investors are always in for the money and thus expect their ventures to give them reasonable returns. In addition, they forecast their investments to grow in value over time, and use them as a hedge against inflation.

Real estate is still the preferred choice of investors.

3. Better profit margins. Profits are among the investors’ main considerations, regardless of the types of investment. Making profits allows them the opportunity to expand their operations, widen their market reach, help in their wealth creation, thereby allowing them to re-invest in more properties and development projects, boost profits further and hopefully, give back to society through their social responsibility initiatives.

4. Passive income. Leasable properties provide investors with the opportunity to earn passive income, improve their cash flow, allow them to have other income sources to cover their cost and regular bills, and as a result provide financial support, acquire stability and enhance sustainability.

5. Diversification. By widening their real estate portfolio, investment losses in poorly performing products can be offset by better running products. In doing so, diversification spreads the risks and reduces financial beatings and negative impacts, especially during the periods of market volatility. 

What else should investors consider?

1. Be in the know. Global and local market economic conditions significantly impact investments. Unless you are a seasoned investor or have extra cash to burn or hold, engage the services of professionals and experts who understand and can guide you in delicately navigating the macro and micro situations of the country and or locality you plan to invest in.

2. Discern proper valuation and good financials. When investing in or buying properties, remember not to overpay and overspend unnecessarily. Not only will returns take longer to recover, it may require you to work doubly hard just to attain breakeven point. For these reasons, veteran investors will carefully study their investments’ profitability prospects and review the financial statements to figure out how much money they will be willing to shell out.

3. Go for quality. Focus on excellent assets. Quality products attract better revenues, allow their overall values to appreciate faster, require lower maintenance costs, and are less likely to be affected significantly during an economic downturn. 

4. Be clear with your investment horizon and timeframe. Knowing how long it may take to get your money back and profit from your investment are imperative. As most investments take time to earn, be ready to incur early losses, and expect gains over the long term. Be warned though: if you stay too long on an investment, you may suffer a higher cost of money vis-à-vis your expected return. 

5. Prepare an exit strategy. Despite due diligence and hard work, not all investments will turn out to be successful. Should your cost run too high, and make recovery very difficult, be prepared to execute your exit strategy. It may be more prudent to dispose of your investment and quit earlier, rather than increase your losses.  

Although there are numerous products available to would-be investors, choosing the right investment is essential. Not all investments are suitable for you. Know these considerations, and choose one or more that best fits your financial goals. 

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Henry L. Yap is an architect, fellow in Environmental Planner and Real Estate Management, and one of the Undersecretaries of the Department of Human Settlements and Urban Development.