Do you know REITs or micro-investments?

Such a purchase of real estate can mean a lot of things. You can invest in land, apartments, cottages, family houses or apartment buildings. An interesting opportunity is also non-residential premises, such as offices, warehouses or garages. Each such property has its own specifics. Are you buying an investment plot? You have to count practically only on the deduction of property tax. Are you investing in buying an apartment? This awaits you with much more to worry about.

Either way, real estate is almost always a larger, long-term investment that needs to be carefully considered. Just a small mistake, such as the choice of a city that depends on a local factory. It may disappear and the apartments in the city will lose value. Or the number of inhabitants in the city will decrease, and renting with a higher supply of available apartments will no longer be so profitable. And what if they build a highway or bypass around your house?

When choosing a property to invest, you need to consider all of these circumstances and try to estimate what effect they may have on your property in the future. Then you also need to calculate what financing will be best for you, and maybe include other investment tools in your decision-making.

Buying an apartment for cash or mortgage financing

That your bank account does not suffer and you can buy an apartment? Congratulations! But it is good to know that it pays to take out a mortgage even though the money in the account would be. Especially if you reach a low interest rate (2 – 3%). The question is how else (and better) can you evaluate such unused money. If you are a little adept at buying stocks or other assets and you can invest with a higher return than 2-3%, it pays to take out a mortgage and invest the cash. In the long term, you will earn on the difference between the amount of return and the amount of interest on the mortgage.

But do not forget about the changes in the interest rate after the fixation period has passed! If you go the way of a mortgage, you will not miss paying 10 or 20% of the total price of the apartment and then repaying the loan with interest. Mostly it is a long-term project for own housing or for subsequent rent. With it, it is ideal that your rental income (after tax) will cover the mortgage payment with interest. Just basic calculus.

REITs and ETFs

However, direct purchase is not the only way to invest in apartments or real estate in general. Real Estate Investment Trust, the so-called REIT, is definitely one of those worth mentioning. If you choose a REIT to invest, you are practically investing in a joint-stock company that invests in real estate. There are hundreds of such trusts around the world, and especially in the USA they are quite popular. The advantage is quite high dividends (money that regularly goes to your account), and at the same time relative carelessness for you. REIT buys, rents, manages and sells real estate, and regularly sends revenue to your account. Sounds great, doesn't it?

Advantages and disadvantages:

  • high dividends
  • fast monetization when needed
  • you buy shares on the stock exchange
  • the investment is exposed to fluctuations in the stock market

There are also so-called ETFs – funds that buy shares of different REITs and diversify the risk of buying only one REIT.

One of the biggest advantages of buying REITs or real estate ETFs is the ability to immediately sell them on the stock exchange, which may not be the case with real estate funds. If you need to monetize your investment immediately, with a REIT or ETF it is really easy.

Real Estate Funds

Real estate funds specialize in apartments, commercial real estate or houses. There is a choice of many Czech and foreign funds, which often differ in the length of time you have to have money stored in them and you do not have a chance to choose it. Usually it is a year to several years. On the other hand, they are more stable, unlike REITs, they are not subject to fluctuations in the stock market, and the management of specific properties is conveniently avoided.

Advantages and disadvantages:

  • stability, you are not exposed to stock market fluctuations
  • you have to save money for a year to several years
  • lower dividends

Micro-investment

A more and more popular way to invest in real estate, and most often in apartments, is microinvestment, which Investown is engaged in. Investing takes place in a simple application environment, where you choose specific apartments, houses and commercial properties in a specific location and know detailed information about their history. Based on this, you invest from CZK 500 and for the duration of the investment (usually 12-60 months) you receive a profit from it.

It is a stable form of investing, where you do not expose your money to market fluctuations, while the appreciation ranges from a very attractive 7% above. As with REITs, you can monetize a micro-investment immediately – for example, by selling it to tens of thousands of other users – and transfer the amount to your account.

Unlike REITs, micro-investments are more stable, as there is no need to buy on the stock exchange, worry about fees and potential risk.

Advantages and disadvantages:

  • stability, you are not exposed to stock market fluctuations
  • attractive appreciation starting at 7% per year
  • distribution of investments, you can compose a portfolio of multiple properties
  • Fast monetization when needed.

Despite the worsening outlook for the leading economies and the forecasts mentioned above, there is likely to be a further rise in interest rates and hence in household and corporate debt.

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