Investing in real estate: 4 questions for a new investor
According to this year's data from the Bank of Lithuania, Lithuanian wages rose by 9.8 percent. - even 3 times faster than prices. Positive economic changes have encouraged compatriots not only to breathe easier but also to think about opportunities to employ their money and grow personal capital. According to real estate expert Viktorijas Vanages, one of the opportunities that help you earn money is investing, but she reminds you that you need to prepare and do four basic homework and not be seduced by get-rich-quick advertisements.
A common Lithuanian, who does not want to live from paycheck to paycheck all the time, is looking for ways to improve his financial situation. The most cautious choose to keep money in the stocking even knowing that the amount of money they have will not only not increase, but will also depreciate over time as the prices of products and services rise. Those who want to avoid the depreciation of their accumulated money think about the possibility of investing, but often do not know where to start. Doubts are strengthened by a great fear of risk.
"For a beginning investor, it is extremely important to find a financing instrument that combines returns with relatively low risk," says Viktorija Vanagė, the founder of crowdfunding company Profitus. - As a result, investment through crowdfunding platforms is growing in Lithuania and the European Union, where even small amounts of money can be invested in selected and carefully checked real estate projects."
Before practically testing this method of investing in real estate, V. Vanagė recommends answering the four most important questions.
What is the investment objective? Investing in real estate is like choosing a car - what kind of vehicle you need depends on your needs: whether you want a family car or a single person, whether you want a sports car or an energy efficient car - these answers will determine what purchase you go home with. When investing, it is also important to set goals and needs. First, identify your investment goal and what you would do with the money you receive. The goals can be various: saving for a down payment, children's education, old age, or a dream trip. The goal can also be additional income from investments, say 300-500 euros every month. However, it should not be forgotten that when investing small amounts, it is especially important to have a permanent investment plan, how much money you will set aside each month to achieve your goal. It is the goal set before and the time period in which you want to achieve it that will help you easily calculate how much you need to invest.
How to choose an investment platform? The number of investment platforms is growing, so in order to find the right one for you, prepare to pay attention to collecting and evaluating information about them. First, check whether the platform you are interested in is included in the list of crowdfunding platforms of the Bank of Lithuania. When entrusting your money, evaluating the platform's users' feedback, experts' evaluations, or comments is necessary. Different platforms offer different investment options – the return/risk ratio needs to be carefully assessed. Another aspect - if you are trying to invest for the first time, choose a platform where you can experiment even with small amounts, say from 50 euros.
What information is most important when investing? Before investing in real estate projects through crowdfunding platforms, it is important to determine the interest rates and risks. Find out whether it would be a primary or secondary mortgage on the property. The main difference between these forms of collateral is that a primary mortgage guarantees you the right to be the first to claim the property if the project fails. Meanwhile, in the case of a secondary mortgage, it is possible that the amount of money received for the sale of the property or its sale will not be enough to repay the investment, since it is given first to those who were pledged with the primary mortgage. As a result, it is recommended to invest in those projects whose real estate will be mortgaged to you with a primary mortgage.
Another very important element in assessing the risk of an investment is the so-called LTV (loan-to-value), in other words, the ratio of loan to property value. It shows what percentage of the loan is mortgaged real estate. So if the investors invested 70 thousand euros, and the mortgaged property is valued at 100,000, so the LTV will be 70%. The lower the LTV percentage, the better, but the primary mortgage should also be kept in mind.
How to reduce the risk? When it comes to crowdfunding, one of the most effective ways to reduce risk is investment diversification, which means spreading investments across different real estate projects. However, depending on your investment goals, it is also important to consider that investing larger amounts often offers additional benefits and additional returns.
When you decide to "employ money" by investing through crowdfunding platforms, you shouldn't expect to get rich quickly. Although everyone would like such a success story, first of all, it is necessary to develop the habit of constant investment, i.e. i.e. reinvest the money earned. Depending on the amount allocated to the investment, you may feel the financial benefits of the investment only after a few years. Don't forget that if you're being promised a get-rich-quick deal, it can be expected that it involves an extremely high risk of losing all the money invested.