Barcelona Properties: Different ways of investing in real estate

Purchasing a property can be much more than finding a place to live. Investing in real estate has long been a popular way of not only capturing and creating value, but also increasing one’s earnings. But as there are plenty of ways in which an investor can make a profit in the real estate market, so too does one have options when it comes to buying and owning a property.

The three most well-known ways of investing in real estate is through the following channels:

Private Investing

Private investing in real estate is the most well-known method. It works on a simple manner of an investor purchasing a property and renting it out for a monthly income in the form of rent from the tenant. The investor also has the option of ‘flipping’ a property, which entails fixing up an older property and selling / renting it out to obtain higher returns.

The advantages:

  • Private investing allows the investor to have a more hands-on approach over their investment. Clients / tenants can be communicated with personally and the property can be refurbished as the investor deems fit.

The disadvantages:

  • The investor will need to have a lot of time in order to effectively supervise his properties’ refurbishment, ensure his properties are well managed, and that tenants’ queries and concerns are taken care of in a timely manner.
  • The investor will require a sizable amount to invest in properties plus a deep knowledge of the property market in various countries and cities in order to diversify his property portfolio.
  • Periods where properties are not inhabited by tenants will affect the investor’s income, especially if multiple properties are vacant for various months.
  • Flipping a property does not always guarantee a higher resale value. In instances where the property market drops, selling or renting a property can become difficult. This results in the investor losing money in terms of holding costs on the property, as the longer a property sits on the market, the greater the odds are that the owner will have to reduce the price, which decreases the anticipated profit.

Real Estate Investment Groups

A real estate investment group is a company or organisation that builds or buys properties on behalf of investors. This minimises both cost and responsibility for the property owners. This type of real estate investing is ideal for investors who want to build a property portfolio while avoiding tenant problems and renovation/flipping issues.

There are different ways of investing in property through an investment group:

  • Purchasing a property to own it for a lengthy time period while generating an income;
  • Flipping a property – buing a property to immediately put it on the market after a few cosmetic fixes (or without);
  • Completely renovating / rebuilding a property with new layout and installations before selling it for a bigger return on investment.

The advantages:

  • The investor still receives an income from the tenants without having to take on their problems.
  • Trading in real estate has a shorter time period and, depending on the market, can produce significant returns even in a shorter time frame.

The disadvantages:

  • The vacancy risk still exists, regardless of whether it’s spread across the investment group or specific to the owner.
  • Hot markets can quickly cool down and leave a short-term real estate trader with a loss.

Crowdfunding Investing

For years, private real estate investing was impossible for ordinary investors simply because it was too expensive. Real estate crowdfunding changed this, allowing individual investors to combine their money with other investors and invest in properties at a fraction of the cost – some crowdfunding models allow investors to invest for as little as €50.

Not only does crowdfunding make investing in real estate cheaper, but also safer. It allows investors to reduce risk by diversifying into various different cities, and across numerous strategies and asset types, instead of just one or two. In addition, the properties invested in are managed by an experienced professional, requiring no hands-on approach from the investors themselves.

To become part of a crowdfunding investment, the investor must visit crowdfunding sites to see various different real estate deals from different companies (known as “sponsors”). Each deal is accompanied by a pitch detailing the specific deal and projected returns. Total projected returns can vary from 6% for conservative deals to approximately 11% for more aggressive ones. Part of the return is attained from quarterly distributions of income to the investor. A lot of deals also have a second part where a large payout is received when the sponsor sells the property and makes a profit. These deals usually last for one, three, or five years.

Should the investor be satisfied with the deal, a contract is signed and their money is deposited and pooled together with other investors’ payments. The sponsor then uses the monies to implement the deal and pay the investors if everything proceeds smoothly.

The advantages:

  • Crowdfunding websites provide lots of options for investors looking to invest in residential or commercial properties.
  • As it’s a gamble to invest all of one’s money in one location, working with a real estate crowdfunding company helps to distribute the risks involved by diversifying the locations of the invested properties.
  • It’s much easier and cheaper investing in real estate with crowdfunding than to attempt it via private investing.
  • Real estate crowdfunding cancels the task of the investor having to personally manage the properties. With the crowdfunding model, the investor simply invests and waits for the money to grow with time.

The disadvantages:

  • As the investment is small, the investor does not have much control over the property.
  • With so many different people investing in a property with the crowdfunding model, the investment eventually becomes rigid. Thus, it can be quite difficult for the investor to sell his part to get his money back.
  • With the majority of real estate investment trusts, about 90% of the rent is divided among the investors. No such rule exists in the crowdfunding model, meaning the investor’s returns can be much smaller in case of a downturn in the market.