Three tips which make “professional” investors successful today

19 Sep '19

In general, investors believe that they are making an investment by simply buying a property, but actually, it is not the case, as expressed by Mariano Capellino, an expert on real estate investments who ensures that when the real estate sector refers to the return of a property, it is only making reference to the economic benefit obtained from its rental.

“Generally, a property is acquired and kept for a long period of time. Today, at global level, depending on the type of asset involved, the rental income can reach 6% annually on average, even though the current income obtained in Argentina is less than 4% yearly, Capellino, founder of INMSA says.

“Professional investors aim to get rental benefits rather than keep the property for a long time.”

“But this return is a theoretical and gross amount, as it is not including a number of hidden costs which affect the final result such as – as clarified by him- insurance, vacancy periods, real estate company´s commissions, administration costs, property taxes, maintenance costs and allowances for future repairs, among others.

As warned by Capellino, if these expenses are subtracted “the return is almost half the number informed by the sector. When they speak about 6% return, actually the net amount received by the investor is approximately 3% per year. And he says: In fact, real estate investment is a totally different thing.

“Real estate investment funds intend to avoid the payment of expenses related to property price transactions in order to start earning from the beginning.”

“The real estate investment, as made by large investment funds, incorporates three variables which differentiate it from the traditional real estate sector which is more oriented to the acquisition and maintenance of the property rather than the investment in real estate:”

One of the key variables in any actual real estate investment is acquiring an asset at a price quite under the market value. Real estate investment funds do not acquire assets at values set by real property agencies or developers because the sale operation (commissions and deeds) is approximately 10%.  If they did so, they would start losing 10% of their investment as it usually happens with real estate buyers. Professional players get important 20% – 30% discounts under the market value, therefore they start earning from the beginning. They do so through a sophisticated approach by acquiring real estate from banks which need to sell immediately and auctions.

Accelerated appreciation rate. In the long term, the real annual appreciation rate of a property, i.e. discounting inflation, is practically zero. This is why real estate assets are considered safe. Now, those investing professionally can achieve returns higher than 10% annually as they target markets which have gone through a deep crisis and the assets, after a strong correction, reached their lowest values, and there is evidence that they are beginning a process of recovery. In general, when a market suffers a 50% decline, there is an increase margin between 80-100% which will take place in a period of 4-7 years, depending on the type and class of asset.

“When a market falls 50%, there is an increase margin between 80%-100% which will take place in 4-7 years, says Capellino.”

Maximization of 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 do not suffer a big devaluation process as it happens in Argentina, which destroys the rental amount in hard currency. It means that as the real estate value has significantly dropped, rentals become really good business

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

“As the real estate value in hard currency has significantly dropped, rentals become really good business, says Capellino.”

Being conservative, you can obtain discounts on acquisition, rental income and appreciations, by implementing a professional approach, it is possible to obtain 16.5% net rental income annually, without leverage, compared to an almost zero profitability provided by the traditional model.” affirms Capellino.

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Source: El Cronista 

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