Many real estate investors start with a specific idea: buy an apartment or house somewhere, often in a neighborhood that suits them, and rent it for profit. Then, if all goes well, they may repeat the process as often as they can and will build a portfolio of properties that will keep them financially fit for retirement.
Although some people may find the success of their investments in this way, they usually need a good deal of these intangible and unpredictable elements to work, namely luck and good timing.
Some investors could become more sophisticated and add a smart solution to their portfolio or self-directed retirement fund, either directly or through a Real Estate Investment Trust (REIT).
But there is something missing. The focus is always on the building, not on the real generator of output and growth of real estate Рthe land. It may sound like a clich̩, but that does not mean it's not true: when it comes to real estate investing, whether directly or indirectly through REIT, it's about the location, the location, the location Рor, to put it another way, the land.
The problem for many real estate investors is that, in itself, the land is difficult to fi nance and therefore difficult to maintain for a given period. It is necessary to improve the land to earn an income. It is a form of development that finances and maintains the field for a long time. At the same time, these improvements constitute a cost of ownership through economic depreciation.
The secret to the long-term success of real estate investments is therefore to seek high quality land (that is, located in a prime location that will become even more desirable) with a low-cost building (or at least one building). it's inexpensive to maintain) that can generate a decent income.
Keeping this in mind, it is clear that properties that require a lot of maintenance and continued investment to keep up with it do not meet this criterion. That does not mean they do not make good investments; rather, it means that for long-term investors, better options are available.
One way to find these investments is to identify properties for which maintenance expenditures, or capital expenditures, are low. This is also known as "CAPEX Retention in Business".
Over time, it can be shown that real estate sectors with a high permanent CAPEX have historically generated lower total returns than those with low CAPEX. The attached graph illustrates this situation with the help of US REITs.
As this graph shows, sectors such as storage and health care – which may seem less prestigious than residential real estate or retail – are doing very well. Their current low CAPEX means more free money available for dividends and reinvestments.
And this is the interest of every investor. After all, when it comes to real estate investing, it's all about performance.
Chris Bedingfield
is a Portfolio Manager at Quay Global Investors,
a Bennelong shop. He is more than 20 years old "
experience of investment banking and equity research
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Goulburn
,
Darlington
,
spring wood
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North Lambton
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Midland
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