In this article, we address some of the benefits and methods involved in real estate investments, a form of investment that, despite its traditional success in the investment landscape, Domoblock aims to revolutionize by democratizing the process through the application of blockchain technology. Read on to discover how:
Real estate investments involve the acquisition of properties by an investor (individual or group) to subsequently generate an economic return from them. They encompass the process of financing, advising, purchasing, renting, and selling properties for profit.
A real estate property or immovable asset is any property or asset that, by being tied to the land (physically or legally), cannot be moved. They are called this because they cannot be relocated. Common examples of real estate include buildings, land, and any derivative thereof that is affixed to the land.
There are numerous ways to generate returns from a real estate asset (which we will discuss later in this article), but in this article, we will divide them into active investment methods and passive investment methods.
Real estate investments work through the acquisition, management, and eventual sale of properties with the goal of generating financial returns. Below, we describe the process and the various strategies investors can use:
Real estate investments can be lucrative and provide long-term financial stability, but they require careful research, effective management, and a deep understanding of the market.
Below, we list some of the benefits of real estate investments:
As can be seen, there are numerous benefits to making these types of investments compared to others or to keeping money in the bank. Although it is true that, as with all types of investment, there are risks of losing part of the invested capital, and a minimum understanding of the market is needed before making any investment.
However, it should be mentioned that there are many different ways to make real estate investments, and each has its own advantages and disadvantages.
In the realm of real estate investments, what are known as active and passive investments can be distinguished. In active investment, the investor is responsible for all phases of the process; they must play a proactive role. Whereas, in passive investment, they simply put their money to work, expecting a higher return after some time.
An active investor is one who acquires a property to sell or rent it directly, or after restoring or renovating it, thereby obtaining a return in the process.
Investment returns can be high, but without a comprehensive management network, scaling these types of investments is complicated due to the amount of dedicated time they require and the numerous bureaucratic processes involved.
Meanwhile, a passive investor hires a company or a real estate mutual fund, who are responsible for managing investment properties in exchange for a commission. In other words, this investor provides liquidity to obtain returns without needing to manage the process themselves.
In this case, the total investment amount is usually (though not always) smaller than in active investment. The return on investment may not be as high, but the risk is generally considered lower as it is managed by industry professionals. Furthermore, it doesn't require dedicating as much time to each investment.
Within each of these two categories, we can find the following ways to make real estate investments:
This involves acquiring a property and then renting it out, thereby obtaining constant long-term returns.
Numerous factors must be considered when making these types of investments, but it is true that there is a constant rental demand and with sufficient volume for this investment to generally be profitable in the long term.
It is often said that owning a property is a good store of value because there will always be people who need to rent, and in the worst-case scenario, you can always put it up for sale.
Regarding the negative aspects of this type of real estate investment, one must consider the potential setbacks arising from renting: maintenance, repair of essential elements, non-payment of rent, etc.
On the other hand, the long timeframe for recovering the investment can be mentioned; however, considering that they can be largely financed by a financial agent, the initial investment and the return time are considerably shorter.
This type of investment involves buying a house (usually) and renovating it, to then sell it again, making a profit in the process.
This type of investment generates higher short-term returns because, depending on the investor's experience and expertise, the returns obtained after renovation can be quite high.
Regarding the downsides, a lot of time must be dedicated to each investment because every part of the process requires finding the best price to achieve the highest possible profitability.
It's a riskier investment because there's a possibility of not finding a buyer after the renovation who is willing to pay enough to cover our investment.
Therefore, in this type of real estate investment, it's crucial to analyze the purchase and renovation costs, calculating the minimum amount we should obtain from the sale to make our investment profitable and assessing whether, given current market conditions, such a sale will be possible.
This technique is simple: rent a property as a tenant and then re-rent the rooms individually as a 'landlord,' since the law only allows partial subletting.
Typically, the property is rented for long periods, and with the landlord's prior consent, renovations (or not) are usually done to adapt the property for room-by-room rental; the profit is made through this intermediation.
The downside is that the owner's consent is required, and this is not often the case.
Furthermore, coordinating the process isn't easy to manage and can become an investment that requires too much work for the profits obtained.
However, this type of real estate investment should not be underestimated, as with a good business network, profits can skyrocket.
This interesting way of investing in real estate is known for requiring smaller investment amounts. In other words, it's more accessible.
Similar to residential properties, the demand for renting a commercial premise, garage, or storage unit is (depending on the area) constant, meaning the investment is recouped within a few years. From this point on, it starts generating 'automatic' profits. However, it remains an active investment, as the process requires direct management from the investor.
Also noteworthy are the lower maintenance costs (electricity, community fees, repairs...) and the lower delinquency rate.
A disadvantage is the lack of liquidity (though less so than residential properties).
Also known as exchange-traded funds or ETFs, these are hybrid investment instruments combining funds and stocks, thus bringing together the diversification offered by a fund's portfolio with the flexibility of being able to enter and exit that fund with a simple stock market transaction.
Furthermore, it's worth noting that these are indexed funds. This means their investment policy is to replicate the performance of a specific benchmark index, such as the IBEX 35 or the Nasdaq 100.
They allow exposure to countries, regions, sectors, and various asset classes through a simple, real-time stock market transaction, at a lower cost than many other investment vehicles.
They provide the real estate market with greater accessibility, flexibility, transparency, and liquidity, offering investors diversification, agility, and low transaction costs (when buying and selling).
As for disadvantages, they primarily present tax risk (international taxes can impact returns), currency risks (the prices of international ETFs are set in the local currency, so a fluctuation in the exchange rate will impact the investment), and liquidity risk (difficulty in buying or selling the ETF).
Entities listed on the stock market, they can be defined as listed public limited companies whose main activity consists of acquiring, developing, and renovating urban real estate properties intended for lease, holding stakes in other SOCIMIs, or investing in land intended for the real estate development of assets to be leased.
In Spain, by law, 80% of the company's total asset value must be invested in these types of properties.
In other words, they own real estate assets that they continuously lease out to generate returns.
In this case, the investor lends their money to one of these SOCIMIs and receives a return in exchange, thanks to the company's activity, which, in turn, retains a portion of the profits, making this its business model. It's a kind of "Buy to rent" as we discussed in active investment strategies, with the difference that in this case, the process is delegated to an external company that does it scalably.
The main advantages of passive investing through SOCIMIs are significant tax benefits, high liquidity in real estate investments, and stable returns for investors. However, like any listed security, it can go up or down (although, it's true that, except for situations where a real estate bubble bursts, this sector has historically demonstrated its resilience and continuous performance). Furthermore, SOCIMIs are very sensitive to changes in interest rates.
On the other hand, the investor cannot decide which specific asset to invest in, as this management is handled directly by the company.
Finally, it can happen that managers prioritize the company's profits and their personal bonuses (the manager's earnings are not based on the specific profits of investors but on the total investment amount of the SOCIMI).
These entities are similar to SOCIMIs, although they are more historically established (SOCIMIs primarily developed from 2007 onwards).
Real estate funds are investment funds that collect money from investors to be collectively applied in the real estate market.
As with SOCIMIs, it is the fund manager who makes decisions about what to do with the fund's resources. The main legal difference is that investment funds are not obligated to be listed on a public market.
Furthermore, investment funds typically manage a larger volume of assets and, for retail investors, they usually require higher minimum investment amounts than SOCIMIs.
The main problem with both investment funds and SOCIMIs is that there is no possibility of investing in a specific property; instead, the investor fully delegates their assets without knowing where or how they are being allocated. There is a lack of transparency in the investment process that can lead to trust issues.
This method allows for crowdfunding from small investors, through digital platforms that act as intermediaries between them and the developer.
It allows investment in specific properties or assets. The investor chooses which asset to invest in, as with Domoblock.
It's a simpler way to start investing than real estate funds.
The downside is:
Real estate crowdfunding is an investment that relies on a third party responsible for managing the property.
The funding platform itself acts as an intermediary without direct control over the projects. This intermediation is directly assumed by each project, to the detriment of the investor's final profitability.
Investments are tied to the timelines set by real estate projects. Most real estate crowdfunding platforms set a minimum period before you can exit the investment or before the property is sold.
If you wish to exit before that period is up, it's unlikely you'll be able to sell your stake due to the lack of a secondary market, or that you can accelerate your exit by paying a penalty.
Technological advancements bring new ways to invest in the real estate sector, and one of them is what we offer at Domoblock.
We combine real estate crowdfunding with blockchain technology for the tokenization of properties and thus democratize access to real estate investment and solve the problems presented by traditional crowdfunding.
This way, we allow investment from just €200 in our own real estate opportunities managed by industry professionals.
The main characteristics of our investment are:
Having analyzed the main ways to make real estate investments, we will now discuss some fundamental tips and aspects to consider when investing.
If you understand how real estate investments work and have decided to invest in one, here are some tips to keep in mind:
Depending on the amount of capital you are willing to invest and the risk you wish to assume, your investment strategy can change radically. Furthermore, you will need to assess how you will finance yourself to take on debts commensurate with your capital and income.
While the profitability of real estate investments has been historically proven, depending on both global and local circumstances, other types of investments may be more opportune at a given time.
If you are acquiring a property or land privately for an active investment, you must check both its physical and legal status. On the other hand, if you are making a passive investment and lending your money to a third party, be well informed about the guarantees this intermediary offers, both legally (potential scams) and in terms of profitability (e.g., that the fund is not profitable or is very illiquid).
The location will largely determine the profitability we can obtain from our investment. Each case is unique, but generally, more populated areas tend to be safer investments.
If you have already decided to make real estate investments, carefully study the different offers that arise, as a low purchase price will allow you to achieve higher returns.
As with any type of investment, it's advisable to have a somewhat diversified portfolio to try to avoid significant losses from unforeseen events known as 'black swans'.
When we store our money in the bank (or at home), it loses value every day due to inflation, which means the purchasing power of the same amount of money decreases over time. While this short-term loss isn't significant (depending on the country you're in), in the long run, accumulated inflation does have a real impact on the total amount saved.
It's also true that investing carries the risk of losing part or even all of your investment, but if certain rules are followed and appropriate precautions are taken, this doesn't have to happen. Furthermore, it's important to mention that even when investing, you should always keep a liquid portion for potential unforeseen events in your daily life.
In contrast, when we invest, we put our money to 'work' for us. We can earn extra profits from the money we've already saved, thanks to the returns generated by different types of investments, but what exactly is 'return'? We'll explain below:
Determining if a real estate investment is profitable involves analyzing several financial and market factors. Here's a detailed guide on how to evaluate the profitability of a real estate investment:
ROI measures the return on investment relative to the total cost of the investment. It is calculated as:
ROI=Net ProfitTotal Cost of Investment×100\text{ROI} = \frac{\text{Net Profit}}{\text{Total Cost of Investment}} \times 100ROI=Total Cost of InvestmentNet Profit×100
NOI is the total income from the property minus operating expenses (excluding financing costs, income taxes, and depreciation).
NOI=Rental Income−Operating Expenses\text{NOI} = \text{Rental Income} - \text{Operating Expenses}NOI=Rental Income−Operating Expenses
The capitalization rate is the ratio between NOI and the property's value. It provides a measure of the expected annual return on investment.
Cap Rate=NOIProperty Value×100\text{Cap Rate} = \frac{\text{NOI}}{\text{Property Value}} \times 100Cap Rate=Property ValueNOI×100
Cash flow is the money remaining after paying all expenses, including the mortgage.
Cash Flow = Rental Income − (Operating Expenses + Mortgage Payments)\text{Cash Flow} = \text{Rental Income} - (\text{Operating Expenses} + \text{Mortgage Payments})Cash Flow=Rental Income−(Operating Expenses+Mortgage Payments)
Measures the return on invested money compared to net cash flow.
Cash-on-Cash Return = Annual Net Cash FlowInitial Capital Investment×100\text{Cash-on-Cash Return} = \frac{\text{Annual Net Cash Flow}}{\text{Initial Capital Investment}} \times 100Cash-on-Cash Return=Initial Capital InvestmentAnnual Net Cash Flow×100
A CMA helps compare the property with similar ones in the area to determine a fair market price.
Use spreadsheets or specialized software to project future income and expenses.
The real estate market can be volatile, and property values can fluctuate.
Tenant issues, such as non-payment of rent or property damage, can affect profitability.
Changes in zoning laws, taxes, and rental regulations can impact the investment.
Evaluating the profitability of a real estate investment requires a comprehensive analysis and a deep understanding of various financial and market factors. With careful evaluation and proper planning, it is possible to make informed and profitable decisions in the real estate sector.
If we manage to create a diversified and robust portfolio, the long-term benefits we gain may allow us to achieve the much-desired financial freedom.
It's important to note that there are countless ways to invest, but real estate investments are undoubtedly one of the safest types of investments available. The value provided by real estate investments comes from the intrinsic value of the asset. Unlike other types of assets, real estate is a necessary commodity in society.
People will always need a place to live, businesses a place to operate, cars a place to park, etc. In other words, these are real assets that retain their value over time. Housing is also a universal human right, so it can be said that demand is guaranteed.
Finally, it is a scarce resource (the number of homes in a city has a physical limit), which makes it a highly valuable asset over time. In conclusion, investing part of our capital, if the right steps are followed, is usually a better option than keeping it idle in the long term. We can obtain both one-off and consistent returns, and if we diversify our investments properly, over time these returns may be sufficient to maintain our standard of living.
And, within the world of investment, real estate investments are one of the best options in terms of both risk and profitability.
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Calera, 3
Funded
100%
598.506,15 €
Target
598.506,15 €
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