“Learn how to invest in properties to create wealth by taking into account evidence-based information relevant to the property investment market.“
There is an important yet highly underrated ability inherent within all of us that, if mastered, has the potential to yield a spree of victories in any field of interest, regardless of the complexities that stand in the way.
Being proficient in using this particular skill guarantees the attainment of success at practically no cost, allowing the user to establish total control over their desires and sustainably deliver optimal performance!!
Any person who adopts this quality begins to exhibit true command over their own self while catalysing the fulfilment of their dreams.
This trait is none other than – Patience.
Patience is not merely believing that “what you have wished for shall be yours eventually”. Contrariwise, the character represents the incessant visualisation of the desire, harboured by an individual, in order to plan systemised steps towards achieving it.
The importance of patience in life is analogous to a finite quest filled with trials and errors, wherein improving our inherent vulnerabilities and faults is the only way to secure achievements in ANY avenue.
Patience illustrates the creation of opportunities and the “elicitation of holistic wellbeing” from it on a daily basis. Regulated under an ambitious vision, patience guides us to traverse through short, medium- and long-term goals while evolving our “perspectives” through “reiterative capacity building”. If incorporated in a network, it ascribes consensus to delegate the way forward in groups while enforcing individuals to resort to evidence. It acts as a core foundation for both the processes of creation and for the procedures of operational facilitation and thus – the primary metric upon which winning investment portfolios are truly devised.
Confused on how this SINGLE metric, both widely discussed but equally neglected, can lead to all of this success, especially in the realm of investments? Well.
PATIENCE, PROSPERITY, AND PROPOSALS!
Humanity has always valued freedom of will and the expression of speech. However, never had such basic human rights attained a level of significance and dominance that is evident today. The internet and all of its “killer” applications (i.e. social media) have empowered ordinary citizens to relay their concerns and magnify them to an unprecedented degree, reaching and affecting thousands of viewers across the globe.
Packaged into neat little “packets” of data, a ripple of information is created across the vast ocean of interconnecting cables and computers. The nature of that packet and the extensibility of the knowledge it holds can disrupt any market or system. Particularly, in the investment market, where millions are spent to shave seconds off in bidding timestamps, the translation of any news (true or false) is ruthlessly fast.
Fig 2. Is the Return on Investment good enough?
As public perception is what drives the “bears” or “bulls” in the market, influencing the market’s dynamics is the objective of all incoming and relevant information.
In a complex world such as this, patience provides the only solution.
Patience is exemplified when a person studies a system well in order to capitalise on its vulnerabilities and exploit its secrets. In the investment market, it is imperative that the nature and structure of the businesses are well understood. Patience ensures this through experiential knowledge (knowledge acquired through experience) that necessitating an agnostic level of planning; taking necessary precautions to account for every realistic and prospective assumption that correlates with our investments market (or assets) of choice.
The best proposals and investors are those who focus on collecting as much information on a viable investment option as his/her resources allow.
They patiently and meticulously plan on increasing their inputs by re-investing a significant percentage of their outputs.
May it be through education, development of technical skill sets, or simply on the basis of experience – patient investors have always risen above the ranks, especially in the long run. Rather than being “leeches upon the economy”, they try to uplift it by carefully entrusting their capital in the hands of forthcoming companies, services, and assets like properties. This partnership has an innate level of risk as it is dependent upon the amount and type of benefit that all of the stakeholders are receiving against the capital or resources that they are staking. With each individual investor having his own will and belief system, the strategies at play do tend to differ in terms of specificities ( e.g. property vs equity, long term vs short term needs, needs vs wants) but always have one thing in common:
” Every successful person plays the long game without losing sight of the low hanging fruits! “
WHY BUY PROPERTY AS AN INVESTMENT?
The value of the short term (i.e. growth stocks) profits are never neglected but are also never overemphasized. Successful investors and investment portfolios focus on preserving an evidence-based equilibrium in the apportionment of their “possessions” across a myriad of investment types, ensuring the liquidity of the capitalised funds through the process of diversification.
In actuality, the true name of this game is risk reduction. Diversification is just one of the most reputed mechanisms that actualises many of the core risk reduction principles through mitigation strategies such as the investing into different asset classes e.g. properties, bonds, equities, forex, and various other options common in asset allocation strategies as well as investing smaller amounts into different assets within an asset class e.g. investing into different categories of properties by type (residential, properties, commercial real estate, etc), return type (e.g. income vs capital growth) geography (region, cities, countries – reducing political, economic cycle and other country based specific risks), size, or for equities, investing in many different types of companies by industry, geography, size, return type etc.
Diversification should be implemented on the basis of information, research, and due-diligence (noting data and past performance may not be reliable indicators of the future so experience, evaluating your risk tolerance levels, and careful understanding of the data and the asset classes being considered is required). Through these measures, the risk, in particular specific risk and to a very limited extent systemic risk, in respect of your investment portfolio can be reduced.
BUT WHY PROPERTIES ONLY?
That would be foolish. It is generally much better (in other words safer) to invest in assets that have proven their efficacy combined with many different asset classes (diversifying as explained earlier), after careful consideration of your circumstances as well as the risks involved for each asset class. However, it is also possible to invest into and manage only a single asset class but taking such steps would require specific reasons e.g. expected higher returns and usually for one to be a specialist in it (even so, we would expect diversifying the allocated stake across the asset class’ various subclasses to be a sensible approach, as explained earlier)..
Therefore, the aim of this article is not to suggest investing in properties only but as part of a diversified portfolio, to help you understand the types of property investments that can constitute your portfolio and the proven ways to identify good investment opportunities, all according to published evidence.
VIABILITY OF PROPERTY INVESTMENT
Properties are a great investment because of their commendable generation of passive income on top of the increasing value of the asset over time. Moreover, property investments have chronologically proven themselves as consistent and “long-term appreciation” builders for millions of people.
The value of any asset, may it be equity or property, can effectively be gauged through the metrics of scarcity and viability. The scarcer a resource, the more expensive it is due to higher demand. Similar is the case with viability; the usability of a product ensures its worth and credibility. With the global population growing at a rate of 1.07% per year and comprising of 7.7 billion people, land is amongst the most sought-after resources on the planet we live on (and the possibility for us, humans, living on another planet doesn’t seem likely any time in the near future – at least based on our knowledge). The more value the land holds or is associated with it due to potentially other attractive features or traits, such as a Silicon Valley or a mining ring, the greater its eventual worth.
Hence, it is crucial for the sake of devising a gold standard property investment portfolio that its multifarious subtypes are properly reviewed.
PROPERTY INVESTMENT TYPES
The various types of properties that have usually comprised some of the leading portfolios are residential properties (RESI for short), and commercial real estate (CRE for short) – with commercial properties further split into hotels, warehouses, offices and factories/industries.
Property can be further split into types by different characteristics, e.g:
- Income vs capital growth
- Under construction vs completed properties
- Under market value (UMV) properties, focusing on great deals within their niche
Some investors prefer diversifying their portfolio by selecting an array of prospective residential and commercial properties in both developed or underdeveloped real estate holdings.
However, a more intricate level of planning can be found within the portfolios of institutional real estate investors. They categorise on the basis of differentiation. Each asset is classified according to the basic business grouping it belongs to such as hotels, shops/retail, industrial sector, and offices. Thereafter, a review of the regional and local markets being served is thoroughly concluded to determine the worth of the product being sold or serviced. Some choose to navigate one specific market whereas others like to pursue a bunch of options simultaneously.
ELEMENTS OF A PROPERTY PROPOSAL
To illustrate this as an example, industrial property investors segregate their stakes amongst distribution plants, warehouses, and manufacturing facilities whereas residential property investors distribute it across the suburban, high rise, and downtown properties of varying quality. On the other hand, hybrid property investors rely on various fundamental and technical analyses and reports supplemented by tailor-made stratagems. A system model of various real estate types and important metrics that shall prove of use to you in crafting your own investment portfolio is outlined in the figure below.
Investment portfolio Diversification
Fig 6. Various Elemets of Property Portfolios, Source : Abel Olaleye, Ife Journal of Environment Design and Management , Vol 5
OPTIONS OF HOW ONE CAN INVEST INTO PROPERTIES
As evident from the diagram “Elements of Property Portfolio Diversification”, there are a number of factors that influence which of the possible property investment options does an investor prefer to determine the final structure of their property investment portfolio.
These options differ primarily in their ownership format of the property investment. In the case of property portfolios, “Investment Vehicle” indicates the type of ownership an individual investor has over a real estate asset such as:
- Direct ownership (including through formation of a corporation)
- Indirect or passive ownerships (including funds, syndicates, REITs and PropTech)
Each category has its own pros and cons. Therefore, the first step towards creating a winning portfolio is to categorise all the prospects and opportunities that lie in front of you in relation to their investment vehicles.
DIRECT PROPERTY INVESTMENTS
The purchase of any property option, may it be residential or commercial, can be through directly buying the property yourself or holding it indirectly e.g. through property syndicates, property funds, trusts, and even PropTech vehicles (see below for details of the latter two). Investors opting for the direct approach are usually retail or wholesale investors.
Direct ownership can offer the greatest potential returns but also present a similar exposure to risk in terms of magnitude.
Forming a limited company for property ownership is a decision that should be explored with one’s accountant with careful consideration of the investor’s personal circumstances along with the benefits and drawbacks of holding the property ownership personally or through a company. Items to consider include tax and any plans to pass on the assets to one’s children.
INDIRECT PROPERTY INVESTMENTS – FUNDS AND SYNDICATES
Investments through funds and syndicates usually require a bit more specialist knowledge but is considered an attractive option for these investors as it has consistently produced risk-adjusted returns. It has also, commendably, enhanced wealth creation activities for nearly two decades through regular distributions of “underlying rental income”. However, these too can depreciate or appreciate in certain markets because properties exchanged through such mechanisms are seen as comparatively illiquid asset type (not be readily convertible into cash).
Yet, still is less volatile than REITs (Real Estate Investment Trusts) as REITs are listed in the stock market, introducing the stock market volatility due to demand and supply mechanisms.
INDIRECT PROPERTY INVESTMENTS – REITS (REAL ESTATE INVESTMENT TRUSTS)
Real Estate Investment Trusts or REITs allow the masses to take advantage of the stock market while eliciting benefit from the property market niche. REITs have historically yielded strong dividends and commendable performance against inflation, therefore, are also commonly used to diversify portfolios. REITs are organisations that own income-producing real estate and meet all of the prerequisites of major stock exchanges. They were established in the 1960s to allow individual investors to capitalise on the commercial real estate portfolios that is structured and curated under the REITs. Nowadays, the popularity garnered by REITs is propelling the surge of the PropTech industry wherein real estate is being targeted through all the mediums of technology. This transition is catalysing due to the collosal demand of fintech specialists as “chief technology officers” at top REITs around the globe. For example, more passive ownerships (publicly traded REITs) do lead to a lower say for an investor in terms of the portfolio’s management operations but at the same time ensures a minimal stake in the portfolio’s yields.
INDIRECT PROPERTY INVESTMENTS – PROPTECH
“Thousands of extremely clever people backed by billions of dollars of often expert investment are working very hard to change the way real estate is traded, used and operated”
– Andrew Baum
PropTech is simply the aftermath of the eventual collision of technology with real estate. This “big bang” led to the inception of three generations of PropTech with PropTech 1.0 being founded through the endeavours of an institution called PMA (Property Market Analysis) whose efforts led to the establishment of the IPD (Investment Property Databank) in 1982.
Thereafter, Wi-Fi and 4G telephony synchronised with sensors, smartphones, agile coding procedures, and cloud computational capabilities propagated the real estate industry to new heights. Supplemented by crowdfunding platforms, open source software, social networking, and e-commerce, the PropTech industry continued to prosper in the era of a digital deluge. Although in a state of paradigm shift, the PropTech 3.0 movement is expected to forever resolve the problem of illiquidity and scalability prevalent within the ‘smart property” industry . More details on “How PropTech is helping people to make money“
KEY ITEMS TO CONSIDER FOR A SUCCESSFUL PROPERTY INVESTMENT STRATEGY
In the world of investments – the nature of the investment market favours those who have the highest capability to survive by any and all means. Those who thrive are not only successful in overcoming the adverse effects of inflation upon their assets but also have an inclination to go on a buying spree whenever fear prevails over the market.
This notion is VALIDATED by the advice of Warren Buffett:
“Buy when others are fearful and sell when others are greedy”
However, in the end, it is always the intent and proficiency of the investor that principally governs the objective of his/her investments. As an individual investor, the objective behind the investment can easily be gauged by examining the preferred threshold of “risk tolerance” and “investment time horizon” (explained below).
Smart investors understand the value of meticulous planning, due-diligence, and identifying undervalued options along with the influence of ongoing and upcoming trends within preferred markets. Below we discuss the key items that every property investor must understand and consider when devising their property investment strategy for a successful performing portfolio.
DIVERSIFICATION – A RECAP
Diversification is very important to us that is why we want to simply remind you to ensure you properly consider diversification (within your wider portfolio as well as your property portfolio as well). As even several real estate investments within the same geographic market tend to yield erratic risk profiles and return performances, associative risk has to be mitigated through the principles of diversification as explained earlier.
Hence, diversification is only realised when an investor is able to derive the risk rating of each individual prospective asset that is to be included in his portfolio. Modern Portfolio Theory (MPT), explained below, is one way of achieving this diversification. However, it is worth highlighting that, based on a research done by Cheng and Liang, 2000 there is no statistical evidence to suggest that diversification achieved through MPT may not be much better than “naively” achieved diversification.
MODERN PORTFOLIO THEORY (MPT)
The principles of Markowitz’s MPT can be applied to achieve diversification. This particular theory is chosen as it was the model that laid down the foundation of the rational approach to “selection, analysis, and management of investment portfolios”. The theory has evolved since its formational stages to offer a holistic approach that realises gold standard diversification in real estate portfolios. The two methods of the MPT approach that are to be applied are:
a) Markowitz Mean-Variance Model
Ever came across the adage “don’t put all your eggs in one basket”?
Well, the Markowitz mean-variance model applied to property investments is able to mathematically demonstrate this statement. It is able to mitigate risk by combining only those assets whose returns have less than perfect positive correlation. The theory has 7 conditions that an asset HAS to provide to structure a well-rounded property investment portfolio (Olaleye, 2011):
- Open access to information that is both free and simultaneous
- Only markable assets to be incorporated, including human capital
- Parts of the asset can be explicitly bought due to the ability of the capital assets to be indefinitely divisible
- The higher the risk, the greater SHOULD be the reward
- Decisions are made solely on the basis of expected risk and return
- Risk should be estimated on the basis of the variability of the expected returns
- Finally, all the assets that were classified into investment vehicles should be represented in terms of a probability distribution of expected returns over a realistic holding period.
Following this procedure, Markowtiz assures that an optimal combination of portfolio weighs CAN be achieved.
b) CAPM – Capital Asset Pricing Model
However, Sharpe found out that really good real estate investment opportunities can lie outside the set highlighted by Markowtiz’s calculations. Thus, he devised an asset pricing model that could increase the efficiency of an investor’s efforts by lowering their risks even further, thereby making the procedures ever more efficient.
The model requires you to make 3 main decisions (Olaleye, 2011):
1) An efficient market is assumed to exist
2) Calculation of sensitivity (covariance estimate) for each asset in relation to the market index
3) Categorisation of all viable options in terms of risk-free or risk induced investment options by calculating the expected return and variance of one or more indexes of economic activity
MPT VS NAIVELY ACHIEVED DIVERSIFICATION
Remember, while MPT may be an approach adopted by sophisticated investors to achieve diversification, there is some evidence to suggest that achieving diversification through other, less mathematical means can be also be equally effective. The key is to understand the correlations and dependencies between the different assets and their asset classes, and then invest smaller amounts in assets that have a lower degree of or no correlation with other assets within your portfolio.
Risk tolerance is the aptitude of an individual to tolerate the volatility or the accumulation of risk within a chosen market niche. There are various metrics through which a diverse set of individuals can be classified as conservative, moderate, or aggressive (or different degrees of risk-seeking and risk-averse) in their chosen strategies.
For example, if the stock or property market of a nation has declined 20%, an aggressive investor is likely to do nothing or even buy if they believe the market is not likely to fall any further; a moderate investor may wait a few months to buy or sell existing holdings; a conservative investor would immediately sell all assets to avoid further losses or not buy until the market has shown some signs of bouncing back.
INVESTMENT TIME HORIZON
Investment time horizon is simply the duration a particular stock is held before it is sold. Having a considerable degree of impact on the rate of return on investments, the investment time horizon can help assess the mentality of an investor. It is often driven by an individual’s personal circumstances.
Portfolio of an individual who has a greater investment time horizon limit may be more open to trade based upon speculation alone, in comparison to an investor who needs profit by the end of the week. Investment time horizon for any particular asset is usually dynamic as it can change depending on the markets, particulars of the asset, and the investor’s circumstances. Hence, investors are usually characterised on the basis of long, medium, and short term time horizons.
GROWTH, INCOME AND PRESERVATION
When the chosen investment time horizon meets the preferred tolerance level of risk, the investment objective of an individual become blatantly transparent. Therefore it is important that you take careful consideration in understanding your investment time horizon as well as understanding your preferred risk tolerance level. The next thing an investor needs to consider is the type of return objectives that applies to them:
- Preservation: preserve the original savings attempting to reduce risk and preserve the capital invested,
- Capital growth: growth of the amount invested usually with consideration of the duration over which the growth occurs,
- Regular income: generate a stream of regular, steady income, or
- Dual or multi-return based: a combination of the above.
Hence, it is critical to also review and understand your return preferences in conjunction with understanding your needs and wants to define one’s investment goals.
ALWAYS MONITOR YOUR STRATEGY AND PORTFOLIO
As the property market evolves, so shall its corresponding portfolios. That is exactly why adaptability, harnessed through patience, plays a major role in the creation of inflation resisting or ideally overcoming and wealth generating portfolios.
The portfolio and associative strategies need to be reviewed regularly in light of market movements and changes in one’s circumstances in tandem with the original factors that went into devising one’s strategy.
Regardless of what objective one may have, an inflation-resistant portfolio is the safest route to start a journey into the world of investments. The following checklist can be referred to when considering any prospective choice of investment, to inspect its feasibility and the opportunity cost (i.e. the loss of value that another investment option could have provided due to investment into the selected option) it presents.
- Acknowledging that the value of a prospect is under the influence of economic cycles
- Determining the stage it is at and the probability of corrections or intrusions.
- While focusing on your selected time horizon, do consider both short and long duration time horizons
- Prioritising the identification and buying of undervalued investment options
- Conducting in-depth analysis and research regarding the various circumstances affecting the selected asset
- Don’t buy assets unless complete knowledge of tax related matters and the volatility of the market surrounding the asset class is not acknowledged
- Diversifying the portfolio comprised of selected assets to protect against the effects of volatility
- Establishing a realistic balance between the income needs of the present day and monetary aspirations for the future.
Be Your Own Portfolio Manager and Join the Revolution
Consideration of the above items will hopefully serve as a good introduction for you to understand how to invest in properties. We always recommend one takes the time to understand the modern day, sophisticated, data-centric techniques applicable to the investment world like MPT and also understand and incorporate the use of market data including index data published by the Government.
Here at Zisk Properties, we are working at the forefront of FinTech, PropTech, Distributed Ledger Technologies, and the Internet of Things. Join us in embracing the 4th industrial revolution and for the opportunity to enhance your learning and net worth in the process.