The First Step to Real Estate Investment: Origination

Investing in real estate is a complex process that can prove to be extremely rewarding if done properly. Most of the people who invest in real estate do not take care of the steps involved in a comprehensive investment strategy. As a large sum of capital is involved even in the lowest of investment options, keeping in mind the who, what, and where of deals is particularly important. Not only does this protect the person from getting involved in scams and frauds, but it also acts as a safety valve against getting involved in loss-making properties. Therefore, the first step toward making investments in real estate can be called the origination process. Who to get deals from? How to get those deals? Where are the deals going to be, and what kind of deals are those? All these questions, along with many others, are required to be answered for successfully investing in profitable real estate. Continue reading to understand the origination process of investing in real estate.

Understanding the who part is perhaps the most important step of investing in real estate. Great real estate investment deals are most often not lying out in the open, and different entities can be approached to access them. They can be brokers, agents, property owners, and developers. However, they do not necessarily have to be real estate related people. They can also be from personal contacts or other professional networks. Real estate agents have a professional license to help people with buying, selling and renting real estate. Most agents work in collaboration with real estate firms, while others can also choose to work independently. Independent real estate agents are also known as brokers; however, they need to get additional licensing for acting as standalone agents. Real estate brokers can also hire other real estate agents to work under them (Segal, 2021).

It is most often the case that people look towards real estate agents and brokers as the first line of action before investing in real estate. However, another good option can be to look toward real estate developers. Real estate developers work in the most challenging field of real estate – land development. They purchase vast tracts of land to build residential, commercial, and industrial complexes (Encyclopedia.com, 2021). They can be approached for investment options because many developers require funding for existing and future projects. Investing with developers can also be rewarding over a longer period of time as developments on land can appreciate its value greatly. After gaining an understanding of who to go to for investing in real estate, it is important to understand the “what” of investing in real estate.

The “what” of real estate investing can include parameters like what is the type of property that an individual is going to invest in. What is the deal size, and what is going to be the capital position of the investor? Properties in real estate are either residential or commercial. Residential real estate consists of single-family homes, townhouses, apartments, and any built structure with less than five units for consumption (Sharestates, 2021). It is mostly found in the form of developed societies that offer all the basic municipal amenities, security features, and management services. If considering a residential property, additional factors like whether is it going to be a rental income property, fix and flip property, a duplex, or a multifamily property also come into play. On the flip side, commercial real estate is used for non-residential activities and includes places like hotels, office spaces, retail shops, industrial buildings, warehouses, and public facilities (Chen, 2020).

Commercial real estate is best suited to those investors who plan for long term profits and are looking for a way to generate passive income. Furthermore, a significant aspect of real estate investment is the deal size. It looks at the value of an individual’s investment and is related to the amount of risk being taken as it can have repercussions for credit ratings and future lending from financial institutions. Lastly, the traditional method of investing in real estate is where an individual buys an asset to become its owner. However, someone might want to join later as a development partner or investor. Therefore, another consideration when someone is coming in to provide additional capital to an already ongoing project is the particular position they gain in that investment. This is called a capital position. Continue reading to understand the “where” of investing in real estate.

The last part of the decision-making process for a real estate investment project is to decide where to invest. Prospective areas can range from areas where an individual lives to different metros, markets that are close nearby, or markets that are new having growth potential. Location is key to valuing real estate. Properties in areas where land is becoming scarce have a higher value than areas with lesser development or population density. The accessibility, appearance, and amenities of a neighbourhood also determine the level of development that is planned for the future. Socioeconomic factors like education and crime rate can also affect the value of a given area. Making investments in nearby areas gives the advantage that an individual is readily aware of most of these factors and can decide relatively easy on the future of a property. In comparison, properties that are not located nearby, or are in a different locality, cannot be evaluated on the same level, and therefore, remain riskier investments. Considering all these factors can greatly reduce the chances of failure, and keeping in mind the where, what, and who of investment deals can narrow down the types of deals an individual can do.

Gathering information regarding an investment opportunity is the most important step of the investment process. It is known as the origination phase of a real estate investment. Three main areas of “who”, “what”, and “where” need to be defined regarding the investment. Deciding who to get the investment option from, what type of property to invest in, and where that property is can become the make-or-break points for a long-term profitable real estate investment.

Chen, J. (2020). Commercial Real Estate (CRE). Retrieved from https://www.investopedia.com/terms/c/commercialrealestate.asp

Encyclopedia.com. (2021). Real Estate Developer. Retrieved from https://www.encyclopedia.com/economics/news-and-education-magazines/real-estate-developer

Segal, T. (2021). Broker vs. Realtor vs. Real Estate Agent. Retrieved from https://www.investopedia.com/ask/answers/101314/what-are-differences-among-real-estate-agent-broker-and-realtor.asp

Sharestates. (2021). Residential property. Retrieved from https://www.sharestates.com/glossary/residential-property/