Making money with real estate
Real estate returns arise from direct rental or operating income and long-term value growth. This combination makes real estate a widely used asset class.
Foundations of real estate returns
Real estate generates returns through two routes. Direct cash flow comes from rental income minus costs such as mortgage interest, maintenance, management and taxes. Indirect value growth is realized when the property is sold.
The combination of both elements characterizes real estate investments. Cash flow provides immediate income while value growth increases wealth. This dual return structure distinguishes real estate from other asset classes. Leverage significantly influences real estate returns. With partial financing, the investor controls the entire property with limited equity. Value changes work through over the total property value, not just equity. This leverage works in both directions, for both appreciation and depreciation.
Cash flow from real estate
Positive cash flow occurs when rental income structurally exceeds all expenses. The surplus constitutes monthly cash flow available for distribution or reinvestment.
In operational real estate, the building itself generates the operating income, rather than serving as a location for activities elsewhere. Parking garages earn from on-site transactions, hotels from overnight stays in the building. Office tenants, on the other hand, also realize their revenue outside the building.
Depending on the type of contract, contract duration, tenant quality and operational performance determine the stability of cash flows. Example: a parking garage with a long-term lease to a reputable operator offers a more planable cash flow than flexible leasing with changing tenants. One need not be better than the other.
Wealth accumulation through real estate
Asset growth in real estate is through debt reduction and value appreciation. Monthly mortgage repayments reduce the debt position while real estate may increase in value. This process creates substantial equity over years. Portfolio composition often influences the rate of growth. Spread across locations, segments and tenants reduces concentration risks. Systematic reinvestment of cash flow accelerates capital accumulation through the compound growth effect.
Investment Strategies
Buy-and-hold holds properties long-term for stable rental income and (steady) value growth. This strategy requires limited time investment after acquisition.
Value-add focuses on value creation through improvement and/or expansion. Improvement can be in operations/operations, the building and/or marketing.
Development transforms land or obsolete real estate. This requires specialized knowledge, network and capital. The risk profile is higher.
Operational real estate
Operational real estate links real estate value directly to business operations. Professional operation often generates higher cash flows and creates more value. Operationalism is not well valued by everyone, which creates acquisition opportunities but also brings more volatility to operations.
Leases are less volatile, offer partial inflation protection and are more predictable. When the rent has a revenue component, it can offer additional income and thus provide higher returns.
Access via Orange IM
Direct real estate requires substantial investment and concentrates risk. Through funds, Orange IM provides access to institutional operating real estate with professional management and direct diversification.
The Orange IM Parking Fund I illustrates this approach with Parking Garage Sint Jorisplein in Amersfoort, leased to Q-Park. The fund handles all aspects from acquisition to disposition. Participants receive quarterly distributions and share in value growth without operational involvement.
