When talking about real estate investment, most people first think of buying a home.
However, the scope of real estate investment is far broader than just buying a home. Real estate investment can be categorized in various ways, with the most fundamental being the type of investment. Direct investment and indirect investment are the two main types of investment.
Difficulties of traditional real estate investment:
- High barriers to entry. Once you buy a distressed property, it's difficult to rent it out or liquidate it, resulting in significant investment and risk.
- High maintenance and management costs. After purchasing a property, you need to renovate it, work with an agent to rent it out, sign contracts, and manage ongoing maintenance, making management and operations very cumbersome.
- Poor liquidity. Real estate has poor liquidity, making it difficult to liquidate it quickly without waiting months or even years. Taxes and agency fees also incur significant costs.
Direct Investment
▍ Rental-Based
Direct investment is primarily categorized as rental-based and sales-based. While purchasing a home is often considered a form of direct investment, not all purchases are investments. For example, if you purchase a home for your own living, it's considered a necessity purchase and doesn't constitute an investment. Purchasing a property for immediate need primarily considers the property's living environment and functionality, as well as personal financial resources.
In rental-based real estate investment, investors generate income through cash flow from daily operations, rather than profiting from price appreciation through buying and selling. Typical examples of this type of real estate investment are hotels, apartments, office buildings, retail shops, industrial properties, and warehousing and logistics. Emerging investment formats such as retirement and vacation properties are also worth considering.
▍ Sales-based real estate investment seeks the difference between the selling price and the purchase price—in other words, the return on asset appreciation. In sales-based markets, developers often hold a dominant position, reaping the majority of the profits, while individual investors typically act as buyers. Sales-based investments are typically one-time transactions, with no further involvement after the sale.
Individual investors can profit from appreciation by buying and selling commercial properties, but they must hold the assets for the long term. Only when these assets are sold in the future can they generate a true return on investment.
Indirect investment
Indirect investment involves investing through real estate-related financial products, such as real estate stocks and real estate investment trusts (REITs). REITs are funds focused on real estate investment. Their primary income comes from rental income, which requires professional management. While the Chinese REIT market is still in its exploratory stages, it holds great potential to grow into a trillion-yuan market.
Summary
Real estate investment can be categorized into two main types: direct and indirect. Direct investment is further divided into sales and rental, while indirect investment primarily includes stocks and REITs. After understanding these investment types, investors can choose the investment path that best suits their circumstances, including their investment preferences, expertise, and financial resources. For example, some may prefer a combination of commercial housing and retail stores, while others may be interested in homestays, or even renting dilapidated properties for renovation and rental. Overall, there's no single right approach; finding the one that works for you is key.