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Exploring Real Estate Investment Strategies

Fixed Rental & Capital Gains Projects

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Real estate remains a popular long-term investment option, promising substantial returns and financial gains and also we discuss Real Estate Investment Strategies. In recent years, the real estate sector has witnessed a surge in construction projects, generating new investment ideas marketed to attract potential investors.

As real estate consultants, we aim to assist investors in making informed decisions through in-depth research and analysis, uncovering the hidden aspects of marketing strategies and investment plans. Marketing companies play a significant role in presenting various investment ideas and plans, including fixed rental guarantees or capital gains, short-term rentals, and more. Today, we’ll compare two investment plans to determine their actual worth for your hard-earned money.

Real Estate Investment Strategies

 

Fixed Income Projects/Investments

The Fixed Rental Guarantee & Capital Gains project is a popular investment model frequently presented to potential investors. This model offers a fixed rental income (typically around 10% per year) alongside an attractive buy-back option on capital gains, ranging up to 5% per annum.

While these numbers may seem appealing at first glance, a deeper understanding of the financial computations and market dynamics reveals that these fixed-income projects may, in reality, produce lower rental yields and capital gains compared to projects offering uncapped rental and capital gains.

Open Income Projects/Investments

Open-income projects allow the market to determine rentals and capital gains. These projects offer organic growth aligned with market conditions and dynamics.

Although there is no fixed guaranteed income in open-income projects, they typically provide much better returns regarding rentals and capital gains.

Understanding the Financial Consequences

One crucial aspect often overlooked by potential investors is the initial cost of investment. Flats with fixed rental guarantees often carry prices that are 30-40% higher than comparable open-income flats. Due to these inflated starting costs, the return on investment (ROI) may be significantly lower than expected, with increased financial risk if the real estate market experiences a decline.

Moreover, even though profits from fixed-income projects may seem guaranteed, they may, in reality, be lower. Historical market patterns suggest that most open-income projects can generate capital gains of up to 30-40% annually in the first five years, with sustained rates of at least 15-20% annually in capital gains for the following five years. Comparatively, capital gains from open-income projects tend to be significantly higher than those from fixed rental guarantee projects.

Understanding Capital Gains and Rental Income Math

The mathematical basis of fixed-income project investments may harbor potential fallacies. In fixed-income projects, rental income and capital gains are determined by the capital invested. However, real estate building projects generally appreciate at rates exceeding 30 percent during construction. Consequently, even without a rental guarantee, the actual rental income after construction surpasses the guaranteed 10% from fixed-income projects.

For example, consider the Goldcrest DHA complex, where flats initially purchased for a certain amount now yield monthly rents far exceeding the guaranteed rental income. Debunking the need for a fixed rental guarantee, this translates to a 15% yearly return on capital investment.

Trading during Real Estate Cycles

Real estate, like other investment tools, is subject to cycles. In markets where real estate experiences tremendous growth, fixed-income projects may limit the opportunity to capitalize on these cycles due to contractual agreements.

On the other hand, open-income projects allow investors to leverage real estate cycles, potentially leading to higher returns on investment by trading through these cycles.

The Hidden Dangers of Fixed Rental and Capital Gain Guarantees

While fixed rental guarantee projects promise stability, they also carry inherent risks, especially in markets with less developed legal frameworks or unpredictable dynamics. Thus, selecting well-managed open-income projects becomes crucial, as they often present opportunities for increased rental yields and capital gains without third-party dependence.

Analyzing Fixed Income Projects vs. Open Income Projects

Let’s consider two investors, Mr. A, and Mr. B, investing the same amount in two projects. Although fixed-income projects with rental guarantees are usually more expensive, we’ll assume similar prices for both projects for this comparison.

Mr. A invests in a rental apartment with a 10% fixed rental income and 5% fixed capital gains per year.

Mr. B invests in an open-income project in a serviced apartment building offering Rental Management Solution.

ROI for Mr. A

This investment is expected to generate a return of 256% over ten years, considering varying rental income percentages. However, the buyback with a fixed capital gain of 5% per year results in a lower total return.

ROI for Mr. B

Mr. B’s investment in an open-income project has the potential to yield an astounding 47% return per year over the same period. The overall net worth would skyrocket with capital gains and rental income factored in.

Higher Rent, Higher Capital Gains

The example clearly illustrates that higher rental income leads to higher capital gains, making open-income projects more appealing in this scenario.

Past Performance

The performance of these projects is better than the expected ROI from fixed-income projects, even without rental income factored in. Furthermore, a construction project can offer at least 60-70% ROI in 3-4 years, surpassing the promised returns of fixed-income projects over a longer duration.

Conclusion

Projects offering fixed rental and capital gains are often priced higher and may limit rental and capital growth. It is better to believe in the product’s value rather than companies or individuals. Investing in rental guarantee projects that offer value for money and avoid excessively raised prices is advisable. Long-term rental or lease models should be approached with caution, and shorter-term rental guarantee models may be more advantageous in the long run.

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