Let's consider all the advantages and disadvantages of investing in real estate and draw conclusions

The concept of investment activity is relatively new to many people in our country.
The capitalist economy familiar to the West came to us only about 30 years ago and only recently acquired a more or less civilized form. Now everyone has the opportunity to engage in entrepreneurial activity, trade financial instruments, in general, invest money and try to earn money. However, not everyone knows what investment activity is. This is what we will talk about next. From this article you will learn:

1. Investment activity - what is it?
2. Types of investment activities
3. Investment activities and speculation
4. Investment goals and objectives
5. Objects and subjects of investment activity
6. Procedure for carrying out investment activities
7. Law on Investment Activity
8. Conclusion

Investment rules

When choosing an investment object, the first thing you should evaluate is the likely return. There are two main ways to make a profit from purchasing real estate:

• Subsequent sale of the object at a price exceeding its costs;
• Providing an object for rent.

And in this other case, real estate should be in demand, attractive for various reasons to the largest number of people. Therefore, the location of the object matters. Thus, residential real estate is more popular in central areas, where transport stops are close and infrastructure is developed. Retail space is in demand in crowded areas. For real estate intended for industrial activities, the advantage will be simultaneous accessibility to resources and the possibility of comfortable transportation of finished products.

When deciding where to invest money, you must first calculate all expenses, including additional expenses for bringing the object into the required form. If major repairs or refurbishment are necessary, there will likely be losses as a result. But in some cases, poor condition is combined with a low price, then the investment may turn out to be profitable.

It is important to soberly assess your strengths and skills when determining what type of real estate will become the subject of investment. Buying an apartment and letting tenants in is much easier than building a shopping center and renting out its space. Certain activities require special education or professional help.

Before making a transaction, it is recommended to analyze the real estate market so as not to undercut or lose a client due to biased expectations. Market prices are influenced by general economic and political processes, due to which jumps up or sharp drops in value are possible, so it is necessary to choose the right time to buy or sell real estate.

To avoid the risk of losing large sums as a result of fraud, when drawing up and checking documents, it is better to contact a competent, experienced and trusted realtor or lawyer.

Investment activities and speculation

You can often come across the question of how an investor differs from a speculator. Points of view here differ; very often one can hear all sorts of accusations against speculators, for example, that the ruble exchange rate has collapsed or stock markets have collapsed. But if you really look at things and understand the difference, then you can doubt the correctness of such statements. So, there are the following gradations showing what is investment activity and what is speculation:

1. Investment activity involves investing capital on the basis of a competent, detailed analysis of the investment object, studying its prospects and indicators . In fact, it is a normal process, but speculation in this form is given the place of short-term transactions aimed at extracting short-term profit. That is, the speculator is not very interested in what is happening in detail, he simply acts to make money. This approach to defining activities was proposed by the famous American financier and investor Benjamin Graham.
2. Investments are considered investments of both public and private capital for a period of more than a year . Anything less is speculation. In general, it is the time factor that is considered fundamental in this matter. The faster capital is extracted from the previously chosen direction, the more it looks like speculation. There is a joke in the stock market - if you buy a stock and it falls, you become a long-term investor. This is partly true, people sit and wait for better times, not wanting to record a loss.

It is important to remember that we are not in the Soviet Union now, so the word “speculator,” although it has a negative connotation in the eyes of the older generation, is currently the basis of the activities of a huge number of participants in investment activities. Can a person buying cryptocurrency be called an investor? Formally, yes, but in fact, this is just a speculator who wants to make quick money, because cryptocurrency is nothing more than just a digital record and the electricity spent on its creation. Without any fancy words, just empty space and a price tag of several thousand dollars.

But at the same time, it is also an excellent tool for making money, since many people speculate on it and the most competent trader will win. The same can be said about most financial instruments. There are all kinds of examples of how people made fortunes:

1. Soros is a famous speculator who has made billions of dollars from market crashes.
2. Buffett is one of the largest long-term investors, moving step by step to the financial Olympus.

So, success can be achieved in different ways, but you have to decide for yourself which path to choose. All these divisions are very arbitrary, the main thing is how much you can earn. In addition, everyone has different goals, we will talk about this further; in many ways, it will depend on the wishes of the investor who he will become - a speculator or an ordinary investor.

Investment in housing

The easiest option to invest money in real estate is to buy a residential property. Housing is always in demand, since a roof over one’s head is one of the primary human needs. Income can be obtained in different ways.

• Buy at a price below the market average and sell at a higher price. Apartments at a reduced price occur during urgent sales, when it is more profitable for the former owner to reduce the price than to waste time. Such transactions are concluded in a matter of days, so the required amount must be quickly available.
• Buy an apartment in a disrepair, unsuitable for living, make repairs and sell for a higher price. This is beneficial if it is possible to carry out repair work inexpensively (established contacts with contractors, there are discounts on building materials).
• Rent out the purchased apartment. Rent can be long-term, for business trips, daily or even hourly. As a rule, the shorter the rental period, the higher the tariff, but the greater the risk of property damage.
• Convert housing into a mini-hotel. It will not be difficult to organize several rooms for guests from a multi-room apartment, separating the parts with doors. It will not be possible to officially use the house as a hospice; the property must be commercial.

Investments during construction stages

The maximum profit can be made by purchasing real estate during the development stages. The earlier the stage of construction, the lower the price. This is a long-term investment, but it's worth the wait. During the construction of the building and its commissioning, inflation occurs in the economy, prices rise, but the amount specified in the contract does not change. As an example, look at this figure:

People are often afraid to purchase real estate that is not yet ready; as a result, there is a surplus of properties under construction with active demand in the secondary market. This contributes to the formation of a significant difference in price. By purchasing real estate in a building under construction, you can achieve a yield of 30%. However, during periods of serious crises, purchasing at the initial stages of construction is risky, since the financial insolvency of the developer cannot be ruled out.

Before concluding an agreement, you need to make sure of the reliability of the developer, his solvency and check whether the construction of the house is absolutely legal.

What it is

The concept itself applies to commercial organizations and industrial enterprises; States invest in their own economies, as well as in each other.

Investment activities are carried out by those who are not indifferent to their own development. Small firms, large transnational corporations, individuals (you and I) - everyone is trying to increase their current income.

In other words, investment activity (IA) is the process of investing money to make a profit (or achieve other goals) after a certain period of time.

Goals and objectives

To achieve this goal, it is necessary to solve a number of problems:

• determine investment programs;
• evaluate preliminary investments;
• calculate profitability, risks;
• minimize risks through diversification or insurance.

Subjects and objects

The subject of investment activity is the one who invests money. The subjects are buyers of securities, creditors, financial companies, project customers, as well as states and international associations.

The object of investment is real estate, securities, intellectual property. That is, an object is an asset to which resources are directed.

Signs

Investment activity has the following characteristics:

• initiative;
• risky nature.

Forecasts always have an element of uncertainty, so risk is an integral part of profit.

Techniques and methods

Techniques and methods can be very diverse - it all depends on the subject of the investment, the specifics of its activities, and the goals of the investor. For an ordinary citizen, working out an investment plan will take 2-3 evenings, while large companies use the power of analytical departments to analyze promising areas.

Forms

ID is carried out in foreign, private, state and mixed forms. It depends on the entity using its capital for investment. The latter type is typical for the joint investment of resources by individuals and government organizations (or foreign companies).

How is ID regulation carried out?

ID is regulated by state legislation and special regulations.

The Russian Federation adopted the Law on investment activities carried out in the form of capital investments (dated February 25, 1999). It sets out the basic concepts, defines subjects and objects, and clearly states the rights and interests of the parties.

Examples

The steel plant acquired new equipment to increase production output. This investment activity bore fruit - revenue increased by 30% per month.

An enterprising student used his savings to buy a coffee machine. He installed a vending machine in his educational institution. After 2 years, the business recouped all expenses and began to make a profit.

Why is investing important?

Income from non-residential buildings for private use

When talking about investing in real estate, we must not forget that it also includes related utility buildings, for example, garages or spaces in closed parking complexes. The costs of purchasing or constructing such properties are relatively low, and the possible profit as a percentage of the price is often higher than when investing in residential real estate.

This is explained by growing demand; there are more and more car owners in the country every year. A permanent garage is often equipped for small service stations, which are increasingly popular among novice entrepreneurs.

In addition, there are fewer costs for maintaining the facility, since the requirements are mainly technical and not aesthetic. The main thing, at the stage of choosing a building, is to correctly determine the location.

Procedure for carrying out investment activities

Before you start investing your capital, you need to understand in advance what will be done and how. You won’t be able to just come and start earning money; this only happens in the case of simple solutions such as investing in a deposit. The better the initial plan and analysis, the better the final result. In general terms, the action plan can be described as follows:

1. Decide on available capital . This should not be the person’s last money, since there are different situations, including force majeure.
2. Explore promising areas in the market . If this is a financial investment, then evaluate all the advantages and disadvantages, understand the risks, choose a broker and then explore the opportunities in the current economic situation.
3. Once the area of ​​investment has been chosen, you can begin to study the available ready-made proposals - this will allow you to understand the structure of the business and, if necessary, create your own based on this template. Either buy the whole thing or a share in an already operating one.
4. Assess enterprise performance , identify strengths and weaknesses.
5. Select the form of the enterprise , prepare all the documents (you will have to tinker with the documents even in the case of simple work on the stock market), go through all the necessary registrations.
6. Launch the business, monitor reporting and compliance with all legal regulations . This is very important, since fines for entrepreneurs are usually very high and can spoil even very good results.

A simple algorithm by which almost all investment activities in the Russian Federation and the rest of the world are built. The main thing is to approach the issue thoroughly, study as much information as possible and only after that start doing something. There is definitely no need to rush into entrepreneurship; it’s not like the financial markets, when in just a few days everything can turn upside down. A typical example is the coronavirus outbreak. A month ago, the markets looked attractive for investing in growth, but now they look attractive for shorting, the collapse does not stop.

Commercial real estate

Owning commercial real estate is not just a passive investment of capital, it is a full-fledged business that requires proper management. Profitability in this case depends not only on the initial choice of the object, but also on how competently the owner will manage it.

Commercial real estate includes:

• Industrial premises;
• Warehouses;
• Retail space;
• Non-residential premises on the first floors;
• Office buildings;
• Construction sites;
• Premises intended for catering.

In order to rent them out, individual entrepreneur registration is required, since the client will be an individual entrepreneur or a legal entity, and the income received is subject to tax.

Variation in rental costs over time is due to a greater number of factors than in the case of residential properties.

• The emergence of competitors or their departure;
• the position of the tenant's industry in the current economic conditions,
• administrative requirements for the technical condition of premises intended for specific purposes (this mainly concerns production and catering);
• Changes in the infrastructure of nearby territories, contributing to an increase or decrease in the trafficability of the facility.

Most often, there are much more legal nuances in the registration of commercial real estate (the previous owner could be a legal entity, perhaps several people owned property rights, the person participating in the transaction does not always have sufficient authority, etc.). Therefore, you should not skimp on qualified legal assistance, despite the fact that these are additional costs.

Investing in comm. real estate has a high profitability, from 15% per year, but is accompanied by a considerable number of risks. If you plan to purchase large areas for various purposes, it is advisable to hire an experienced manager, whose responsibility will be the level of income of the investor.

Investment Valuation

To prevent your investing career from going to waste, I advise you to extremely carefully select the projects in which you plan to invest your funds. In order to save yourself from migraines caused by colossal losses, before making an investment, evaluate its effectiveness . The best place to start is with a preliminary assessment.

Efficiency mark

To assess the effectiveness of your investments, I suggest you calculate the main indicators that will help you draw conclusions regarding how correct your decision was to direct your funds to a particular project. So, arm yourself with a calculator and do the following:

• evaluate the profitability of your investments using the profitability index;
• calculate the payback period of investments ;
• find out what the net present value of the transaction will be;
• find the internal rate of return on the investment.

Risk assessment

After you decide on the profitability of your venture, take the time to assess the risks of your future investment. This can be done by modeling changes in the main indicators of the project and determining the sensitivity of the latter. Personally, I advise you not to reinvent the wheel, but simply draw up several business plans :

• based on a pessimistic scenario (take as a basis the situation with the most unfavorable conditions for the implementation and operation of the project);
• based on an optimistic scenario (based on the most favorable conditions);
• based on a scenario with average data as close as possible to reality.

In the resulting range of project performance, you will be able to identify clear boundaries of the risk that you will face when you decide to invest your funds in this activity.

Land plot

Even taking into account all the economic crises, land in general is becoming more expensive. Therefore, investments in the purchase of land are becoming an increasingly common investment option. But at the time of acquisition it is necessary to foresee how this site will be used.

• There are instructions in the current legislation on the use of land. It cannot be simply owned, it must have some kind of real estate on it, or it must be involved in agriculture or industrial development.
• Before purchasing a plot, it is necessary to familiarize yourself with the urban planning plans in order to avoid the land and surrounding areas falling under municipal needs.
• The site on which the industrial facility is planned to be located must meet the requirements of the enterprise. Land remote from the city is cheaper, but the longest possible lease is more likely.
• If the site involves placing a residential property on it, it is important to know what will be nearby. A residential complex of multi-storey buildings or a factory that appears behind the fence can greatly reduce the value of land.

Flaws

But investing in real estate is not suitable for everyone, and these investments are not effective in any period of economic development. There are a number of disadvantages, risks and difficulties of such an investment.

• Purchasing real estate requires large financial investments. The use of mortgage offers is advisable in rare cases. Only if there is confidence in real profit or the loan term is so long that inflation will exceed the interest rate. It's better to use free money.
• Compared to other investment options, real estate generates less income. The main purpose of investing is to preserve capital, and not to increase it. An exception may be commercial real estate or global construction projects.
• The property owner is dependent on legislative changes. So now additional living space will be subject to increased taxes. Frequent amendments to questions regarding land plots. New standards and requirements may apply to non-residential buildings.
• There are many associated costs: registration of the transaction, taxes for the sale/purchase, taxes for individual entrepreneurs (in the case of commercial real estate), payment for the services of a lawyer and realtor, maintenance of the property (routine repairs, utility and tax payments).
• During periods of crisis, prices can fall sharply (as a rule, they subsequently normalize, but not in one year). On the eve of recovery from the crisis, it can be profitable to buy small-sized housing, but you should not count on quick income. In addition to macroeconomic factors, the cost of an object can be affected by various changes in the improvement of the city and the availability of jobs in a given locality.

Investing in real estate has its pros and cons. In order not only to preserve your capital, but to be able to earn money by investing in square meters, you need to learn to understand the intricacies of the real estate market, understand the true price of the property, be able to effectively manage property, take into account possible risks and adapt to external changes.

Law on Investment Activity

All investment activities are regulated by Federal Law N39, it contains all the necessary information. In general, it cannot be said that entrepreneurs are somehow severely limited compared to how it is done abroad, but otherwise it is also necessary to focus on various amendments, changes in the procedure for submitting documents, additions to the law, and so on. Sometimes it happens that the adoption of certain by-laws can lead to the complete degradation of an entire industry; this is far from uncommon. Just yesterday, a business that worked well becomes unprofitable under the new rules.