When does 'Real Estate' become an Investment?

Buying real estate is about more than just finding a place to call home or buying any so-called ‘hot property’ that’s being marketed by salespersons. Although the real estate market has plenty of opportunities for making big gains, buying and owning real estate is just as complicated as investing in stocks and bonds.

So, when can you say that a real estate purchase is an investment? Most of the time, it depends on one’s definition. Here’s the definition I subscribe to:

"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return." - Benjamin Graham and David Dodd

That definition is from one of the mentors of Warren Buffet and was focused on stocks and bonds type of investments, but I believe the same can be applied in real estate.

I subscribe to that definition because it implores you to at least do the necessary due diligence to ensure a certain ‘margin of safety’ when investing. This is because most people just think of investing in real estate by simply buying a property anywhere and rent it out or wait for it to increase in value in order to make money. This is where having an insider’s view of the market is important, knowing which areas are hot or not.

Recommended Read: Lazy Real Estate Investment - Condotels

A real estate becomes an investment when it’s primary goal or purpose is to generate income or profit.

Real Estate Investments

Rental properties – People think this is easy, but it’s not (marketing, property maintenance, collections, security, taxes and the like). Here are some ways to rent-out properties:

* Boarding house for students or professionals to stay in.

* Have the land rented out for at least 25 years or so.

* If you have an oddly shape property beside a road, you can build a billboard and rent out ad-space.

* Develop Industrial or IT zones where they rent out the land, or they create their own building, and rent that out to companies (outsourcing, warehouse).

* Another way is to buy a ‘condotel’ type of property (a condominium project operated as a hotel) where you buy and own a condo unit that is rented out. The property management company does all the work for you while you just collect your share of income.

Recommended Read: Overview of Real Estate Investing Basics for Beginners

Real Estate Investment Groups - Like rental properties, this can take various shapes.

* This can be as straight forward as becoming a Real Estate broker/sales persons and sell real estate from developers

* You can invest as a corporation and make a Property Management company

* Become a real estate developer, buy-sell and develop properties

* Group investment – a group of people pool funds to buy-sell properties or to develop a property and then rent it out while splitting the profits

Real Estate Commerce – strategic buying and selling of properties

* Flipping – you buy undervalued (or maybe foreclosed ones), provide improvements and then sell it

* REITs (Real Estate Investment Trusts) - is created when a corporation (or trust) uses investors' money to purchase and operate income properties. REITs are bought and sold on the major exchanges, just like any other stock and must pay out dividends.

As with any investment, there is much potential and risk, and gains are not assured all the time. Make careful choices and weigh out the costs and benefits of your actions before investing!

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