Understanding Real Estate Investment

Published on 9th September 2008
An Apartment Block
If one believes there is no difference between an Automobile Engineer and an Automobile Salesman, they might as well believe there is no difference between a Real Estate Broker/Agent and Real Estate Investment Strategist.

Most real estate Brokers are transaction driven shooting for commission payment. If one is venturing into real estate investment, they should seek the counseling of individuals/firms with the depth of knowledge including tax benefits, returns and risk analysis, and exit strategy required in investing in a volatile industry. One should mostly use real estate agents and brokers for identifying available properties and use other experts for additional service.

Because of the relative ease one gets into real estate industry first as a Salesman and later within two years as a broker, if they chose, many in the real estate especially brokers, take the high road of playing investment advisory services.

That is not exactly proper. The real estate industry in US is deeper than what most tertiary level brokers and agents hold out to the public. The CCIM (Certified Commercial Investment Manager) designation, a tedious designation to earn in the industry clears demarcates the line.

Let’s take a look as Chuck Okonkwo's, suggestion that purchasing a home is a major investment for most. He is right. But that is boiler plate information which is not very true. A home is a consumer product and not necessarily an investment in the real sense of investment. Home ownership is a liability requiring responsibility that many home owners are not equipped to handle. As a result, the off and on situation with foreclosure.

An investment can be anything including our clothes, movable and fixed assets. But an investment in the investing world, is an asset when analyzed on an annual basis indicates trend on risk, rates; return on and return of, with sensitive indicators that may move an outcome to a level triggering a buy or sell situation. In a home ownership, there is not per se, a rate, return and inherent industry risk associated with typical investment because one does not off-load their house/home (except flippers), if in a given year price of homes drop. Instead, one looks at the tax benefits, rent versus mortgage payment and the terminal value or exit value of the home when one is ready to sell.

No one should be fooled by the abundance of available homes and believe that the field is agog with deals. The deals are, if one is looking for a home to buy as a primary residence, the market may afford an opportunity.

Outside of that, investing in a home as an investment places the buyer/owner in a reliability position. Mortgage is basically handled in two manners: Amortization or Interest Only with a Call or Balloon at a given time. The latter is hardly used except the borrower has other resources or is in a market where home prices outpace household income to where it is very hard to meet the down payment requirement.

A good example is in California and New York, where less than 4% of folks can afford the median home price. For the others, lenders lend on Interest Only basis, with the expectation of an upside benefit (future value) at a given time. To retire a debt is based on rent or wages expectation; as a ratio expressed by DCB - debt coverage ratio. And when one pays nearly a third of their disposal income towards a mortgage, they are stretching it. A comfortable margin is less than 15%, but then one is dealing with a high income earner.

Real estate constitutes about a two-third of America's economic wealth, and because of the size of the industry (considering the rights associated with real estate and real property) it is a complex industry beyond the mere understanding of a real estate broker who is driven by transaction and commission. For what it is worth, the Igbos say that one should not hang their bag where it will be hard for them to reach it if they need to. Cut one's coat according to size, and one will live happily ever after. As Africans, we need to seek counseling when it comes to investment and not advice.

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