Last Updated on 06/01/2021 by Steve Wanjie
How real estate works. Many people around the world ask, “How does real estate work?” You are aware that you could make beautiful dollars in this industry. But you do not have the appropriate knowledge to dive right in.
The intent of this article is to enable you to have a better understanding of how real estate works. WHY?
Beginner real estate investors, brokers, and agents, often get into trouble because they lack better knowledge of how real estate works. If you are unaware of how the property market works, you will make costly mistakes.
Even though real estate is a fantastic investment tool, better than the stock market by far, you fear getting in because you think it’s too hard and costly.
What do you need to excel in real estate?
- A positive real estate investor mindset
- Knowledge-willingness to learn how the industry works
- Have a clear property investment goal
- A clear real property investment plan
- Have a vision
- Hard work ethic
- Signed documents (anchored in law) in every deal you undertake
Everything has to be written and signed to be enforceable in law. If you want to buy a property, you have to do an offer in writing to the seller. There are no verbal agreements in real estate trading. Make use of qualified and licensed professionals in every step when buying or selling real estate.
How does the real estate work?
The real property industry works because:
- Of value appreciation guarantee
The value of real estate keeps rising (most of the time.) When it goes downwards like in a recession, it comes up again pretty soon. Property values don’t stay suppressed for long during a depressed economic situation.
- Healthy Profit margins
You are able to buy and sell property making healthy profit margins most of the time. You are able to make a profit trading in real estate as long as you understand how the industry works.
- It is immovable
Land does not move. It remains where it is. Same applies to developments on it. It is a solid investment. It is hard to lose it. Not unless you fail to meet your debt obligations.
- Service providers get their share too
Real estate agents, brokers, lawyers and lenders, share a portion of this profit by providing enabling services to those involved in a real property deal.
Why does real estate value rise?
- The location changes with time
The location tends to improve with the development of public amenities. These could include better roads, schools, hospitals, shopping malls, airports, water, electricity, etc. The environmental growth of a location leads to real estate appreciation.
- Population growth-supply and demand
When the population of a location grows, the demand for real estate appreciates too. People need shelter, offices, schools, etc. A rise in population, of course, leads to increased demand for land, and housing.
- The cost of borrowing
Real estate developers need funds to develop new properties. If debit interest is high, the developer has to recover the borrowing expense to the consumer. Thus, property prices go up. When prices go up, they rarely come down. Interest on home loans will always cause price gains in real estate.
What is real estate market?
The real estate market consists of;
- Buildings and any other structure on the land
- Livings things on it-animals, insects, and plants
- Dead things on it such as; stones, sand, minerals, dry wood
- Water above and below the ground
- The air above and below the ground
- All the rights to the land, above or below it
This is how real estate works in the real economic sense
- Develop the land
- Rent or Sell the property
- Repeat the process
- Acquire land
The land is the cornerstone of real estate. Without land, there would be no real property market as you know it today. Someone could be you, who has to own a piece of land. You could own it through buying or inheritance.
Make sure your finances are in order
You need to prove to the seller that you have the funds to buy the land. Some of the documents that can help prove funds availability are;
- Bank statement
- Money market account balance
- An open equity line of credit
How do you find land for sale?
The easiest way is to speak to a real estate agent who specializes in buying and selling land. Always work with qualified, licensed, and experienced real estate professionals. It saves time and money. A professional agent will help negotiate for the right price (or value of the land.) He or she will ensure legal processes are being followed. Land agents are able to tell genuine land documents from fake ones.
Therefore, begin your land purchase process by finding a qualified professional in this field. Search online first via Google, “real estate agent in Nairobi,” for example, if you want to buy land in Nairobi. You could as well ask friends to refer to a good land sales agent they might be using.
2. Develop the land
What can you do with a piece of land after buying it?
You can do 3 things as discussed below.
a) Become a Wholesale land dealer-Sell it as it is
You can choose to trade land as a whole seller. Buy land and sell the same at a profit as you bought it. You end up making money for yourself. And that is fine.
b) Retail land dealer-Sub-divide it
In this case, you buy a piece of land and sub-divide it into smaller portions. This is particularly popular in Kenya. You sell smaller pieces to those who want to build homes. This way, you make more money than selling land at a wholesale price.
You buy one acre of land and sub-divide it into 8 pieces. These pieces would be size (50×100) square feet each. This size is ideal for an individual to build a home. This is a popular plot (land) size for a middle-class home builder in Nairobi, Kenya.
c) Add value to land–dealer
This is what many real estate developers are doing in Kenya. They buy large pieces of land and develop homes for sale. You buy land, build houses, and sell the same to prospective homeowners.
Other developers buy land and develop commercial properties. These could be for rental income or for sale too. Some opt to develop shopping malls.
There are professionals that you need to work with:
- Land surveyor – for (b) because the land has to be sub-divided for title deed issuance
- A lawyer to prepare property sale documents
- A lender – to finance the construction of proposed properties
- A contractor – in charge of the construction of desired properties
- A real estate agent to help list and sell the properties
3. Rent or Sell the property
In real estate, an investor has three trading options after developing a new property (or properties.) You can choose to;
a) Rent for rental income
Renting gives you a passive income stream. It is a long-term and guaranteed source of income and you could depend on it in retirement.
Advantages of owning rentals:
- Tax benefits
- Rent prices tend to increase regularly
- You can acquire bank loans against the property
Disadvantages of owning rentals:
- Real estate is not a liquid asset, hence cannot provide cash in emergency situations.
- Property insurance can increase anytime especially due to man-made or natural disasters
- Taxes could increase faster than the rent increases
- Tenants are difficult to manage
- Maintenance expenses could eat into your income regularly
b) Lease the property for lease income
You could lease your property to an organization for a number of years. That could be a period of 5 or 10 years. Some organizations may choose to pay yearly installments, while others may opt to pay for the whole lease period in one upfront payment.
In a lease agreement, you (the investor) is not in charge of the property. All maintenance works are done by the persons leasing your property. You receive the payment and wait for the lease to end. Then you get your property as you had leased it in the beginning, in sound physical condition.
c) Sell it and make profits on sale
This is simple. Develop properties and sell them immediately. Then you start on a new project. You could build a house that costs you 3 million and sell the same at 6.5 million. After deducting all expenses, inclusive of marketing and sales, you could end up with 2 million in profits. Developers love this area of real estate trading.
How Real Estate works for Agents
A qualified real estate agent can start at the bottom of the food chain if your main goal is to become an investor. Yes, get in with zero money and grow from the bottom up with time and experience gained along the way.
You don’t need to have money, in the beginning, to invest in real estate. You may start as a freelancer or offer to work for a real estate agency on a commission basis. Your work is to find clients. Those who want to sell, and those who are looking to buy. If you are a freelancer real estate agent, you get a selling commission from the seller and a buying commission from the buyer. Why? Because you connected the two. They didn’t know each other, you are the one who introduced them.
Locate a property on sale, find the owner, and ask to find a buyer for them. You agree on your commission. Then you go find a buyer. Agree on your commission with the buyer for finding them a property to buy. Now you get to introduce the buyer to the seller and see the transaction through. That is how a young you could easily start making money in real estate.
Real estate could easily make you rich. Get your training online on Udemy or Coursera. There are many free, and paid-for courses on real estate. After obtaining your certificates you need to get your trade license. Then you start practicing to gain experience and to make money.
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