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Special report on the real estate market
July 1, 2019
The abyss between investing and buying real estate
The report developed by Mariano Capellino, CEO of INMSA, delves into the methodology used by large investment funds to invest in real estate and which differs significantly with the custom of small and medium investors. The result of this custom: low yields and being exposed to possible crises that affect the value of your property. In general, investors think that when they buy a property they are investing. But really, it’s not like that. When the real estate sector talks about the performance of a property, they talk especially about the economic benefit of their rent. This is reasonable since generally a property is acquired and maintained long term. Today in the world, depending on the type of asset, a rental can reach, on average, a return of around 6% per year, although in different countries, it may be lower. But that profitability is theoretical and gross, since it does not take into account a large amount of hidden expenses that affect the final result. For example, insurance, lack of income in vacancy periods, administration costs, property taxes, maintenance expenses and reserves for future repairs of the property, among others. Finally, the performance ends up being almost half of what is said in the sector. When speaking that the yield is 6%, in reality what the investor puts in his pocket, ends up being approximately 3% per year. In general, given that rent is the only variable that is considered to define the profitability of a property, and if we consider that it can be 3%, it is logical to think that investing in real estate is not an attractive and high-yield business. .
Actually, real estate investment is something completely different. Real estate investment, as do the real estate investment funds, incorporate 3 variables that differentiate it from the traditional real estate sector that is oriented to the purchase and conservation of real estate, and not to invest in real estate.
One of the key variables of a real real estate investment, is to buy well below the market value. Real estate investment funds do not acquire real estate at the value that is bought in a real estate company or at the price set by a developer of a project, since transaction and purchase transaction expenses (commissions and deeds) are around 10% with some differences depending on the country concerned. If they do, they would start losing 10% of the investment, as it normally happens to property buyers. Professional players achieve discounts in timely markets between 20 and 30% of the value of the good in the market to start winning from moment zero. And they succeed because they buy sophisticated portfolios of real estate from banks that need to liquidate them and in auctions.
The second key variable is the rate of accelerated appreciation of the property. In the long term, the real annual appreciation rate of a real estate asset, that is, discounting inflation, is practically zero. That is why it is said that real estate assets are a refuge of value. However, those who invest in a professional manner, achieve appreciations of more than 10% real annual as they look for markets that had a deep crisis and assets, a strong correction, have touched their floor and there is evidence that their value began to rise for recover its historical value. In general, when a market falls 50% it has a margin of between 80 and 100% of increase that will occur in a period of 4 to 7 years, depending on the type and class of asset.
And the third variable is the maximization of rental profitability. When a property is acquired at a value much lower than the real one, for example 50% below the historical value in a developed market where rents are constant, the rental yield is usually doubled. In countries such as the US or Spain, for example, the value of a rental remains constant- that is, since the value of the property has decreased so much, the rental yield really becomes a big business. For example, today in Detroit the profitability of a rental can exceed 10% net annual. In suburban areas of Madrid, rental profitability is around 7% per annum net This table shows the difference between the traditional real estate method of investing versus a professional methodology, which is used by large real estate funds or as they make the few real estate investment companies that exist in the world. Being conservative, with the discounts in the purchase, yields for rent and appreciations, with a professional model, it is possible to obtain yields of the order of 16.5% per annum ne
About INMSA
INMSA is an American company specialized in developing and managing real estate investment funds and products. It helps individuals, companies and financial institutions of Latin America to make real estate investments according to their profile, maximizing their profits taking advantage of the changes in market cycles. It is not a developer or a real estate broker. INMSA investigates the cycles of the global real estate markets to decide where it is appropriate to enter looking for the best profitability – risk equation to protect and increase the real estate of its investors. It detects in which country of the world to invest, in what city and area and in what type and class of asset. Negotiates the purchase of real estate at prices significantly lower than those of the market and defines an exit strategy for each asset based on the yield it generates for rent and the potential for appreciation. The objective is to ensure that investors obtain the highest profitability and can reinvest in new operations, obtaining sustained results in the medium and long term. It also analyzes the real estate asset portfolios of investors and recommends strategies to improve portfolio performance.