REAL ESTATE PRESS: THE SECRET TO MAKING MONEY BY INVESTING IN REAL ESTATE

When the real estate sector referred to the return of a property, the only economic benefit they spoke about was the rental income. This was the reasonable formula for our grandparents, this is not the opportunity granted by the real estate investment in the current markets, as explained by Mariano Capellino, founder and CEO of INMSA, during an interview conducted by Press Real Estate from their offices in Miami.

PRE: Why purchasing and renting property is no longer a true investment?

CAPELLINO: The economic benefit produced by a rental property is what you usually get when an asset is maintained for a long period of time. At global level, depending on the type of asset involved, a rental can reach an average income of 6% annually even though in Argentina it is currently under 4% annually.

But such income is theoretical and gross amount as it is not including numerous hidden expenses which impact on the final result. For instance: insurance, vacancy periods – when the property is not rented there is no income generated – real estate agency commissions, administration costs, real estate taxes, maintenance costs and allowances for future repairs of the property, among others.

The return ends up being almost half the number informed by the sector. When we speak about 6% return, actually the net amount received by the investor is 3% annually.

As the rental income is the only variable taken into account to define the return of a property and, if a 3% rental is the percentage which can be obtained, it stands to reason that investing in real estate is not a very attractive and high-return operation.

PRE What is the difference with the true real estate investment?

MC: The real estate investment, as performed by large investment funds, include 3 variables which differentiate it from the traditional real estate sector which is oriented to the acquisition and maintenance of the property rather than investing in property.

One of the key variables in a true real estate investment is to acquire an asset at a price quite under the market value. Real estate investment funds do not acquire assets at values set by real property agents or developers to avoid sale operation costs (commissions and deeds) of approximately 10%.

If they did so, they would start losing 10% of their investment as it usually happens with traditional real estate buyers.

Professional players get important 20% – 30% discounts under the market value, therefore they start benefiting themselves from the start. They do so by acquiring real estate from banks portfolios which need to sell immediately or auctions.

PRE What other variables impact on true real estate investments?
MC: The second key variable is the accelerated appreciation rate.
In the long term, the real annual appreciation rate of a property, discounting inflation, is practically zero. This is why real estate assets are considered safe.

Now, those investing professionally can achieve appreciations higher than 10% annually as they target markets which have gone through a deep crisis and the assets, after a strong correction, have reached their lowest values and there is evidence that their value is starting to recover their historic value.

In general, when a market drops 50% there is a margin between 80% and 100% increase which will take place in a 4-7year period, depending on the type and class of asset involved.

PRE During that period of 4-7 years isn´t it profitable renting the property?

MC: That is the third variable in a professional real estate investment: the maximization of the rental income. When a property is purchased at a value quite below its actual value, e.g. 50% under its historic price in a developed market where rentals remain steady, the rental income usually doubles in value.

In countries such as USA or Spain, for instance, rental values remain constant, therefore during crisis periods they are not affected by a big devaluation such as in Argentina, which destroys the rental income in hard currency, i.e. as the real estate value has significantly dropped, rental become really good business.

For example, today Detroit provides a rental net income over 10% annually. In the suburbs of Madrid, the rental income has reached 7% yearly.

In order to better understand what a professional real estate investment is, you can read this fragment from an interview made to Mariano Capellino, CEO of INMSA.

INMSA´s real estate investment model

We are explained by Mariano Capellino that the big difference between the traditional property investment approach and the professional method used by large real estate funds or companies such as INMSA is the total annual income which can be generated by the real estate investment.

PRE How much can you earn by implementing INMSA´s approach?
MC: Being conservative, you can obtain 20% discounts on acquisition, 9% rental income and 8% annual appreciations, by implementing a professional approach, it is possible to earn between 12% and 16% net rental income without leverage.

For this reason, we say that there is a huge difference between the acquisition of a property for its subsequent rental and a true real estate investment.

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Source: Prensa Real Estate