Real Estate Investment

1. Definition

Real Estate involves the purchase, ownership, management, rental, and/or sale of real estate for profit. It creates wealth through two main drivers: Appreciation and Cash Flow.

2. The Power of Leverage (OPM)

Real Estate is unique because it allows the extensive use of OPM (Other People's Money). * You can buy a \$500,000 property with only \$100,000 down payment (20%) and borrow the rest from a bank. * If the asset price rises, your return on equity (ROE) is magnified significantly compared to buying cash-only assets like stocks.

3. Why Invest? (Pros)

1. Tangibility: It is a "Hard Asset." You can see it, touch it, and improve it. It has intrinsic value that rarely goes to zero.
2. Inflation Hedge: Historically, real estate prices and rents tend to rise with inflation, preserving purchasing power.
3. Tax Benefits: (In the US context) Investors can deduct depreciation, mortgage interest, and operating expenses from their taxable income.

4. The Risks (Cons)

1. Illiquidity: You cannot convert a building into cash instantly. It can take months or years to sell at the right price.
2. High Entry Barrier: Requires significant upfront capital compared to stocks.
3. Management Intensity: Unlike stocks ("Click and forget"), real estate requires maintenance, tenant management, and dealing with regulations ("The Toilet, Tenants, and Trash").

5. Key Metric: Cap Rate

Used to estimate the return on investment for income-generating properties. $$Cap\ Rate = \frac{Net\ Operating\ Income\ (NOI)}{Current\ Market\ Value}$$ * It represents the yield of a property over a one-year time horizon, assuming the property is purchased on cash (without debt).