1. What is investment property
Investment property — real estate (land and/or building) that is at the disposal of the owner in order to receive rental payments and/or income from capital gains.
Real estate is one of the oldest and most stable investment instruments. Investment real estate is classified into residential and non-residential. Residential real estate purchased for the purpose of generating income is usually considered commercial real estate and includes single-family houses/villas (occupied by the owner) and apartments/apartments in apartment buildings/hotels. And non-residential includes office, retail premises, restaurants... There are also other types of real estate such as warehouses ...
The demand for real estate depends on consumer spending, the economy as a whole, the number of jobs, population growth, the level of savings and the level of tourism in tourist countries and regions)
Rental prices vary depending on the quality of the property, location and type of real estate.
Reasons to invest in real estate
1. Current income. Investors can expect to receive income from rent collection after payment of operating expenses, financing costs and taxes.
2. Capital gains. Due to natural population growth and tourist flow, the value of real estate increases, which increases the total income of the investor.
3. Inflation hedging. During inflation, investors expect an increase in both rents and property values.
4. Diversification. Real estate, especially private equity investments, reduce risk compared to expected returns.from investments in stocks and bonds.
5. Tax benefits. In some countries, real estate investors enjoy preferential tax treatment.
Main risks
1. Inflation. Property values may not keep pace with inflation when markets are weak and vacancy rates are high.
2. Cost and availability of capital. Real estate must compete with other investments for capital. The demand for real estate decreases when there is little borrowed capital and interest rates are high. Conversely, demand is higher when borrowed capital is easy to obtain and interest rates are low. Thus, real estate prices can be influenced by the forces of the capital market without changing the demand from tenants.
3. Demographic factors. The demand for real estate depends on the size and age composition of the local market population, the distribution of socio-economic groups and the rate of formation of new households.
1. Renting.
2.Purchase/Sale
2.1.Purchase of real estate before the construction of the object and sale immediately after construction.
2.2. Purchase of real estate on the primary market and sale on the secondary market.
3. Purchase of real estate in order to save money and sell more than a year later.
Comparative approach
First of all, the value of commercial real estate is determined by the market value; that is, the most likely sale price that a typical investor is willing to pay. The sales comparison approach is most useful when there are several properties similar to the item that have recently been sold, as is usually the case with single-family homes.
A costly approach
With the cost approach, the cost is determined by adding the cost of land to the cost of a new building, minus adjustments for estimated depreciation and obsolescence. The cost approach is often used for unusual properties where comparable transactions are limited.
Profitable approach
The cost is based on the expected profit required by the buyer to invest in the assessed property, which also allows you to determine the payback period In the income approach, two methods of assessing the value of real estate are used: the direct capitalization method and the discounted cash flow method.
- First of all, it determines net operating income (PMT) - Net Operation Income (NOI), which is equal to rental income for the year minus all operating expenses. (NOI does not take into account income taxes ...). Simply put, this is the profit for the year.
After determining the profit for the year, the capitalization rate is determined
CapRate = CHOD / the cost of the object x 100% .
For example, the net profit from renting out $ 36,000 per year. The cost of the property is $156,000. Therefore, the capitalization rate is 23%. The capitalization rate is actually the yield per year and allows you to determine how long the investment in
- Over time, money loses its value compared to the current one, so it is necessary to take the current moment of evaluation as a reference point and bring all future cash receipts (profits /losses) to the present time. To do this, the discount rate is determined.
- A country. Economic indicators of the country such as GDP, inflation, population growth, tourism growth, the stage of market development.
- City. The location of the object can have a significant impact on a good capitalization rate in real estate. A higher capitalization rate usually affects risky locations.
- Market size. A large competitive market may have lower capitalization rates than a smaller and riskier market.
- Asset stability: The future stability of the property value can be considered.
- Growth potential. Real estate with great growth potential in a growing market may also be affected by capitalization rates.
- Capital liquidity. The capital investments you invest in real estate have a significant impact on the rate, as they directly affect the NOI.
4. The international investment real estate market.
Currently, the average return on investment in various countries and regions of the world provides 4% per annum and in some countries it may be negative. Rating of international real estate.
Profitability in each country depends on many factors, but the most indisputable of them is global economic cycles. Currently, the global real estate market is in the stage of a decline in demand due to the saturation cycle of the market (stage D) and, in general, the resumption of real estate market growth can be expected in 10 years.
At the same time , there are a number of countries that are at the beginning of the emergence of the market and therefore are countries with high investment attractiveness!
These are the markets we find and offer to our customers.
5. Stages of investment property development
Before purchasing real estate for the purpose of investing for a long time, it is necessary to understand at what stage the market of the country where it is planned to purchase real estate and receive rental income is located. In total, it is considered to be 4 stages of development of the real estate market. The duration of each stage is on average 7 years.
1. The phase of decline. It is observed in an oversupplied market where the number of available real estate is increasing. The owner of the property needs to make intensive efforts in the field of marketing and finding financial support. Real estate prices are declining. This is the buyer's market.
2. Absorption phase. Due to the lack of new construction, which is the result of the recession phase, the decline in real estate prices, the supply and demand in the real estate market begins to grow. The market absorbs idle objects. After the investment surpluses are absorbed, rental rates will begin to rise.
3. The phase of new construction. The demand in the construction market is increasing along with a reduction in supply. Rental rates increase along with the price of real estate. During this period, the inflation rate increases, and the cost of construction increases, which increases the sale price of the property.
4. The saturation phase of the market. The growth of real estate sales is slowing down. There is a surplus of finished construction products and capacities. The level of employment begins to decrease, and construction activity gradually stops.
The best time to increase property is the phases of the absorption cycle or the period of new construction. At the same time, the real estate market is emerging in Bali, which is more like the beginning of an absorption cycle - this suggests that in the next 14 years, an increase in the value of real estate and rental rates is expected. #0385a6
6. What you need to pay attention to when choosing a country and a real estate object and how to choose the country of investment.
The return on investment differs by country and within the country depending on the region, city, district. Therefore, it is necessary to first study global trends, for example by looking at international ratings - Rating of international real estate. And after that, as we said earlier, we have already studied the local return on investment, for example, using the comparative method of calculating payback - "Calculating the return on investment".
Also be prepared for the specifics of entering money, registration of land and real estate and income generation. For example, in Bali, land is transferred to a foreigner for a long-term lease of up to 100 years, and a real estate object can be bought into ownership or sold. You can read more about the forms of ownership of real estate in Bali in the Questions/answers section.
We have outlined the skills necessary for an investor in the article - 7 skills of a real estate
7. Why it is profitable to invest in Bali island located in Indonesia.
Macroeconomic - Indonesia is a developing country
with a population of 275 million people
Population growth of 10% per year over the past 10 years.
Inflation is 4% per year.
The mortgage rate in Indonesia is 5%-6%.
The average passenger traffic is 10 million people per year (excluding the period of the coronavirus epidemic).
The tax for the provision of real estate for rent or for the sale of real estate worth up to 500 thousand dollars is 11%.
- The annual growth of tourism in Bali has exceeded 20%
- Bali's annual property price growth is 12%
- The investment yield from renting real estate in Bali is in the TOP yield and has reached 15% per annum.
- The return on investment at the construction stage exceeds 30%
- Bali is number 1 in terms of investment attractiveness of GOBankingRates
- Forbes ranked Bali 4th in the world.
- TripAdvisor declared Bali the best tourist destination in Asia and ranked it 4th in the world.
1.Tourism in Bali is limited by the volume of ready-made housing and the permissible height of the building (villas up to 2 floors and hotels up to 4 floors) this ensures a constant increase in prices, while prices per square meter of real estate have not yet reached the world price level. The average cost of m2 of housing in the cities of Indonesia (1,586 $ m2) , which is two times lower than the cost of m2 in Russia (3,730 $) Price rating by country. At the same time, the main buyers of real estate in Bali, in addition to local buyers, are residents of neighboring Australia with an average cost of $ 5,556 per m2, Canada 7,008 per m2 $ or the UAE 2,222 m2 $. Therefore, in most cases, real estate objects are bought at the construction stage. After construction, the cost of housing increases by 30% - 50%
2.The world ratings of investment real estate claim that Indonesia and Bali are the number 1 in terms of profitability in real estate investments. The article is "Top countries for investment". The average rental yield in Indonesia is 8.61%, the average yield in Bali is 11%, while we see that the real yield without taking into account the growth in the value of real estate is 15%, and the growth in the value of real estate is 12% per year.
3. We see significant economic growth in Indonesia and an increase in tourist flow relative to other countries. Bali is in the top 20 cities visited all over the world. On average, 12 million people arrive in Indonesia per year, most of whom visit the island of Bali with a population of 4 million people. On average, tourists in Bali rest for 1 month.
Thus, every fifth person in Bali is a tourist.
At the same time, tourists, expats and older people staying in Bali for years are not taken into account.
Currently, tourists with a good income level from Western countries come to Indonesia, who spend an average of $ 4,000 per month on accommodation:
Australia 107,946 38%
India 31,945 - 11%
England 26,222 - 9%
Singapore 26,156 - 9%
US 22,027 - 8%
Germany 19,225 - 7%
France 19,178 - 7%
Holland 11,342 - 4%
Malaysia 10,906 - 4%
Vietnam 6,095 - 2%
4.Constant actual recalculation of the return on investment in real estate in Bali, shows a high payback - the yield exceeds 15% per annum. Examples of payback can be seen here - Investment payback account. You can also study the - rent calculator for professionals.
5. What else makes Bali so
popular among tourists?
Equatorial climate - the average air temperature is 26 degrees with an average water temperature of 29 degrees Celsius. At the same time, by Russian standards, it is summer here all year round.
Nature - Bali is washed by two oceans and is a green island of 5,415 km2, where you can live in the most beautiful locations in the world - by the ocean, by a palm forest, on the banks of a river or lake and even in cool mountains.
Culture and Religion - Balinese Hinduism is aimed at respecting and bringing good to people. Bali residents are the kindest people who respect tourists and provide them with the most comfortable living conditions.
And finally, Bali's investment climate is aimed at attracting investors and developing infrastructure, so the state has made it as easy as possible to obtain land and build real estate.
1.Rent - Hak Sewa “leasehold”
2. Right to use - Hak Pakai ”right to use”
3. Unconditional right to property - Hak Milik “freehold”
1.Rent - Hak Sewa “leasehold” with registration with a notary, most often used when purchasing ready-made real estate.
An ordinary lease agreement is concluded between the owner and the investor.
It can be notarized, but it is not registered with the relevant authorities, which is different from Hak pakai.
Term of ownership:
The term of Hak Sewa is not regulated by law, accordingly, no one prevents the parties from concluding it for 100 years by prescribing the procedure for the transfer of rights and obligations by inheritance.
Ownership right:
In this case, a regular lease agreement is concluded between the owner and the investor.
It can be notarized, but it is not registered with the relevant authorities, which is different from Hak pakai.
The lease agreement does not have to be confirmed by a notary – it is enough that it is signed by two witnesses and it has been certified with stamps.
It is important that the lease agreement contains, among other conditions, a clause regulating the need for the landlord to independently pay tax on the income received.
Taxes:
Under Hak Sewa contracts, income tax liabilities arise only from the landlord (10%), but property taxes, annual land taxes are paid by the tenant.
Recommendation:
The Hak Sewa contract is used when acquiring a plot of land with a built real estate object. After obtaining a lease for the construction of a new facility, another lease agreement is required - Hak Pakai ”right to use" allowing you to obtain a permit for the construction of a new facility.
2. The right to use - Hak Pakai ”right to use” with registration in state bodies and with a notary. It is most often used for the construction of new real estate.
The exclusive right for a foreigner to use land, and this exclusive right is legally secured, about which a corresponding certificate is issued, which is necessarily registered with state authorities.
Term of ownership
Up to 80 years (initial term of 30 years + extension for 20 years + extension for 30 years).
The right to own:
When a foreigner purchases real estate, he is issued a certificate indicating his name in the column "owner of the exclusive right to use" or Hak Pakai.
At the same time, at the time of issuing such a certificate, the previous owner is completely deprived of the rights to use it and any operations with it, which means full protection of the foreign buyer from legal risks.
To purchase under the Hak Pakai agreement, it is necessary to have a company in Indonesia and a KITAS visa, which is issued for owners or employees of law firms registered in Indonesia.
Taxes:
For a tax resident of Indonesia, the tax on the sale of real estate to another person will be 11% of the total cost.
Recommendation:
The Hak Pakai contract makes it possible to obtain a permit for the construction of a new facility, therefore it is recommended for those who need to build a new facility on their site.
3. Unconditional right to property - Hak Milik “freehold".
Rarely used.
According to the legislation of Indonesia, only its citizens can own land in this country. But, despite this, there is a scheme that allows foreigners to acquire real estate ownership.
Term of ownership:
According to the legislation of Indonesia, only its citizens can own land in this country.
The right to own:
It is concluded as a notarized loan agreement with a foreign investor by an Indonesian citizen, where the purchased property acts as collateral. In this case, the guarantee that the Indonesian does not cancel his power of attorney is the documents confirming the fact of the loan, as well as an additional long-term lease agreement. This option, of course, has serious drawbacks, the most important of which is the following fact: the real owner of the property is an Indonesian citizen.
Taxes:
Taxes on purchase and sale are 5% of the cadastral value.
Recommendation:
This type of real estate registration is mainly popular among those who plan to obtain Indonesian citizenship and re-register the property for themselves later.
The purchase of real estate for a legal entity is registered with a notary, which is 1% of the value of the object and with the state local government bodies of the district.
Webinar about the investment real estate market in Bali