How to Start in Real Estate Investment and Types of Investments

What is Real Estate Investment?

This concept is quite simple—it involves acquiring properties with the goal of generating financial returns. These properties can range from land to houses, storage units, parking spaces, offices, commercial premises, or industrial warehouses, like the ones you can find at Engel & Völkers.

This financial strategy allows you to generate extra income and discover opportunities, even during periods when the economy isn't at its best. It’s important to understand the benefits in order to maximize them.

Benefits of Real Estate Investments

Greater Stability

Investments in real estate tend to be more stable than, for instance, stock market investments, where fluctuations are constant and varied. To find out what the evolution of the real estate market in Spain is, you can download our annual report.

Security

The demand in the real estate sector is constant, so you can be sure that there will always be buyers interested in purchasing or renting properties, regardless of the economic climate.

Flexibility

One of the biggest benefits of real estate investment is the flexibility it offers, as it’s not only about buying and selling, as is commonly believed. We will provide examples of this later.

Tax Benefits

Investing in real estate provides advantages compared to other financial actions, as taxes are typically lower compared to other sectors. In fact, foreign investors who invest in Spain can benefit from the Beckham Law or the Golden Visa.

Security in Times of Crisis

Economic recessions often bring uncertainty, but in the case of real estate, it acts as a safe haven for capital. In other words, its value won’t be affected as severely as in other types of investments.

Usability

Another advantage of real estate is that it can be used for personal enjoyment and practical use.

There are numerous benefits to acquiring properties and making them financially productive, but it's essential to understand the various real estate investment strategies available.

Real Estate Investment Strategies and Types

There are different types of real estate investments, but not all of them may be suitable for you, depending on your specific situation. Let’s define the various possibilities:

Active Real Estate Investment Strategies

In this strategy, the buyer handles all the management tasks. Typically, properties are renovated or improved to obtain higher profits. This method generates consistent income through the property. Here are different types of active real estate investments:

Buy-to-Rent

This type of active investment provides periodic and recurring income through rent. In this case, it's important to study the market beforehand to know if there’s a demand for rental properties in the location. Calculating potential returns is also crucial. Factors like maintenance costs, taxes, insurance, community fees, the initial investment, and projected annual rental income must be considered.

Buy-to-Sell: House Flipping

Another active investment strategy is to purchase a property to sell it, also known as house flipping. As with buy-to-rent, the idea is to add value through improvements. This way, when you sell the property, not only will you recover the initial investment, but you’ll also increase your capital by selling it at a higher price.

Rent-to-Rent

This more peculiar approach can also generate active income in the short term. It involves renting a property and, with the landlord's prior agreement, subletting rooms to other tenants. This allows you to recover your initial investment while earning extra monthly income. As in the previous cases, it’s important to conduct the necessary calculations to ensure profitability.

Passive Real Estate Investment Strategies

In passive real estate investments, a company specialized in the sector manages your capital in exchange for a commission. The goal is to generate passive income.

The returns are typically lower than with active investments, but depending on the real estate project chosen, the security of obtaining those returns is higher, and the effort on your part is minimal. These are the different passive investment strategies:

Exchange-Traded Funds 

This is a hybrid between stocks and mutual funds, offering the diversification of a fund's portfolio with the flexibility to enter and exit the investment through a simple stock market operation.

Real Estate Investment Trusts

These are entities that trade on the stock market and focus on acquiring, promoting, and rehabilitating urban real estate, shares in other real estate investment trusts, or land to rent out and generate investment returns.

Real Estate Investment Funds

These funds pool investors’ capital to invest collectively in the real estate market. The key difference is that they aren’t required to be publicly traded.

Real Estate Crowdfunding

This involves multiple investors collectively acquiring a property, as the value of the real estate is high. The major advantage is that it allows you to diversify your investments and reduce risks by spreading your money across multiple properties.

Tokenization of Real Estate

This strategy involves converting the economic rights generated by real estate assets into blockchain tokens for sale. Tokenization in this sector is a way to raise capital for companies by using blockchain-based tokens for transactions.

How Do Real Estate Investments Work?

When considering a real estate investment, it’s always advisable to seek advice from someone specialized in the market who can guide you through the different types of real estate transactions, as we do at Engel & Völkers.

Market Analysis

The first step is to study the market situation and the opportunities offered by properties, both in real estate and financial terms, to ensure that the investment will be profitable.

For example, data from the Bank of Spain’s Annual Report on the housing market shows that buying properties to rent is a good investment opportunity, offering a 10.5% return per year over the last eight years (2015-2022), outperforming the stock market and government bonds, which yield no more than 7% and 1.5%, respectively.

Property Acquisition

Once you’ve identified the property, you proceed with the purchase process. This includes negotiating the price, reaching agreements, and signing the contract within an agreed time frame.

Property Management

Finally, after acquiring the property, you must choose the right strategy to ensure a positive return on investment. In some cases, it may be necessary to make improvements to the property to increase its value and profitability.

Types of Real Estate Markets

Within the real estate sector, we can find various market segments in which to achieve returns on investment:

Residential

This is the most common sector, encompassing housing-related properties such as apartments, houses, and flats.

Commercial

This segment includes properties used for business activities, such as office buildings, retail spaces, and hotels.

Industrial

These are properties intended for production, storage, and distribution of goods.

Retail

Retail properties include shops and other premises used for consumer-facing businesses like grocery stores, shoe stores, or shopping malls.

Vacation

This sector focuses on properties related to tourism and leisure activities, an active market in many countries, including Spain.

Land

This market is exclusively dedicated to acquiring land for future sale or development, or waiting for its value to appreciate.

Agricultural

These properties are used for agricultural and livestock activities.

Mixed-Use

Some properties serve multiple purposes, such as residential, commercial, and industrial uses within a single property.

Special Purpose Properties

This category includes properties that don’t fit into the other categories, such as hospitals, schools, stadiums, or churches.

As you can see, understanding what real estate investment is, is not enough. It’s crucial to know the sector and seek guidance from experts who can advise you and point out the investment opportunities that best fit your needs. At Engel & Völkers, we’re happy to help you.