Jacinda Lumme & Miika Hautamäki

1      INTRODUCTION

Real estate investing is a popular method of investing around the world. In real estate investing the investor is looking out for potential lots, houses, apartments, or warehouses to invest in and with the hopes of later selling it at a higher price and then receiving the profits. Real estate investing has a lot of different aspects that you must observe, for the investment to be profitable and good. Typically, people tend to perceive real estate investing to be easy and simple, however the volume of aspects that need to be considered falter this perception. The investor needs to think about the investment from different perspectives for example thinking about the tenant’s perspective on why they would rent the place or why would someone buy the real estate they are selling. Therefore, the investor needs to think about the properties’ condition and the year it was built all the way to also thinking about the properties location to maximize the properties potential. In addition, the investor needs to make sure that the property stays in good condition while the tenants are renting the place. This takes away time and money from the investor which eats away at the property’s profits. Overall, this could eb considered a negative when thinking about real estate investing. Based on this, investors aim to maximise the profitability of the properties. (Brock 2023.)

2      REAL ESTATE PORTFOLIO

2.1      What is a real estate portfolio?

A real estate portfolio is a document that includes one’s real estate investments in one place. As a whole real estate portfolios are a method of tracking your investments in the real estate industry once you start to have a variety of them. The portfolio can be seen as your resume in the property investments. It can include an array of investments for example rental properties, flipped houses, commercial real estate or long term renting. The portfolios can range from a few rental places, to owning own residential buildings and more. (Brock 2023.)

Residential properties are the most known type of real estate investing. Residential investments are usually active investments, which means that the investment will likely require monetary and labor contributions from the investor, but they have the potential to bring in sizable profits and continuous cash flow. Residential properties give the investor passive income and when they have been able to find the right type of property, the properties give a sizable boost to monthly incomes. The properties typically appreciate in value over time and hence the odds of earning a decent return to the investment is pretty high. In addition there are tax benefits when investing in real estate, an example of this is being able to use different kinds of tax deductions. However, it is important the investor has to know what they are doing, since real estate investing also has its own risks and these must be taken into consideration before starting to buy properties.  (Richardson 2022.)

Another aspect of a real estate portfolio is commercial real estate which includes non residential investments such as warehouses, shopping centers, offices, hotels, sports facilities and retail stores. Commercial real estate investing is often seen as the better form of these investment types, because usually commercial real estate is known to yield higher returns than the residential real estate. However commercial real estate often requires a lot more capital which often keeps people off from the commercial side.  (Richardson 2022.)

It is also possible to invest in raw land, which means to buy land that has nothing on it. It is common for many people to use their raw land by renting the land to farmers for agricultural purposes or buy the land in hopes of its potential going up. Meaning the valuation of the land goes up and results in the selling of the land at a higher price. Raw land is incredibly easy to acquire and it is a lot cheaper than buying already developed land. Investing in raw land can also be more cost efficient when thinking about the maintenance cost, this is due to the fact that when there is nothing but raw land there’s no need to maintain it in the way a residential property would need maintenance. However if an investor is looking for fast money then investing in raw land would not be the right decision, since it may take decades for the land to turn into profit. (Richardson 2022.)

The latest method of real estate investing is crowdfunding, this is when investors get together, typically online, and pool their funds together and then invest in opportunities where they would not be able to invest by themselves. This method of investing requires much less money upfront from everyone and it is also considered as passive income. Although, in some cases it is needed for persons to prove a certain level of income before becoming a part of the investors in a project. Crowdfunding is an extremely beneficial method for investors to diversify their portfolios without actually needing to invest too much money in the end. Also the opportunities that crowdfunding provides investors are much more unique than what they could achieve by just investing with their own funds. (Richardson 2022.)

2.2      How to build a real estate portfolio

For an individual to start their real estate portfolio, initially it is important to understand the meaning of it and also understand how a real estate portfolio works and why it is important to your financial success. A real estate portfolio is a summary of the different kinds of investment assets that an individual holds to manage and achieve a financial goal. It can be seen as a catalog of the current and past real estate deals that one has. A well done real estate portfolio will not only work as a resume for work that one has achieved but it will also work as a marketing method for one to get funding or a chance for future deals.  (Merrill.)

When the portfolio is maintained well, it will showcase personal investment goals and strategies, the deals that have been worked on and are owned at the moment, as well as success and failure rates. When building a real estate portfolio, it is important that the portfolio has been both done and maintained well as it serves as a resume of work where investments can be not only marketed but also used to acquire funding. The portfolio investors are paying attention to different aspects in the portfolio prior to thinking about potentially investing in it. They are looking for numbers, objectives, asset allocation and management. (Merrill.)

Numbers

The building of a real estate portfolio is based on the numbers, which are the foundation to the portfolio, and tell the truth about how the portfolio is behaving. This aids in transparency with investors, and this is going to help get the investments. Therefore the numbers should comprise each investment broken down into numbers like price, holding cost, profit, repair cost. The numbers need to also contain the improvement costs and the monthly operating costs. The numbers will provide a feeling of the associated costs of the projects and the money is being used to earn profit in the end. Therefore at all times the portfolio needs to be up to date and comprise all the figures needed in investments. (Merrill.)

Objective

The investors are looking for what is trying to be achieved with the portfolio. Each of the  portfolios are going to be acting differently during different times. Hence why investors are looking for the end goal of the investments so that they know what they are putting their money on before choosing the assets they are going to invest in. The types of real estate investments you have in your portfolio will play a significant role in achieving your goals, as rental properties aim to achieve passive income and assets like wholesaling and rehabs look to accrue short-term gains. (Merrill.)

Asset allocation

Asset allocation is one of the important parts of starting and maintaining an investment portfolio. This means determining the right model of asset allocation that suits your goals in the best way. The appropriate allocation of assets will take into account your personal goals and also your risk tolerance in the investments. For example one might have a style of asset allocation which is going for consistent gains that last long and have low risk, and another one might have the kind of asset allocation which is going for fast gains which then holds a lot more risk in them. (Merrill.)

Management

Lastly there is the management of the properties. The investor has to make decisions regarding the management of the property, for example they have to think who is going to do hire a company to do the overseeing of the investment or will they become the landlord and take care of it themselves and also saving money by doing that. Investment portfolios should always contain this information of who is taking care of the property, and how much the managing is costing. (Merrill.)

Building a considerable real estate portfolio benefits a investor in many ways. The portfolio can be an source of passive income and provides one with a steady cash flow. This passive income will provide the ability to pay off the mortgage debt that the property was likely bought with, once the debt is paid the property will give you passive income that will stay as profit to your own pocket. The properties can also appreciate in value over time, and this way for example help to fight against the inflation of the world. Diversifying your investments in many different places aids with lowering the risk of the investments. The investments in real estate also give investors benefits in their taxes. For example most of the expenses in rental properties are tax-deductible. (Merrill.)

When an investor wants to expand their real estate portfolio, they should remember to take advantage of the portfolio that they already have and leveraging that already existing portfolio. The portfolio can be leveraged when trying to get funding for the new projects and when looking for new projects to work on.In addition the portfolio works as credibility when negotiating for possible new mortgage to buy another property or even in the starting talks of getting a new project. (Merrill.)

2.3      How to ensure high tenant occupancy levels

For a rental investment property to be profitable it is really important that the occupancy levels stay as high as possible, for the investor to gain the most amount of money from the property. This is concern that an investor might have when taking care of an rental investing property. For the property to be occupied as much as possible, the investor can look out for different things to make that happen. At first the investor should consider about the properties location when making the purchase for it. The location is a deciding matter for a lot of tenants, and the location can be a really big reason for someone to rent the property. After the purchase of the property, the investor should focus on marketing the property in the right way. When using things like social media marketing and rental listing sites, you will have capability of reaching more people and that will lead to more people renting the place after seeing it online. For the marketing to be successful it is also important to update the listing and the advertisements with time. The ads and listings need to be up to date so the customer gets what they are paying for and there will be no surprises which will lead to bad experiences and bad reviews about the property. Once the property has been rented, the investor should make sure that they build a good relationship with the tenants that they have renting the place. This is because when the tenant feels good about the owner of the place they are more likely to stay renting the place and not moving somewhere else because of feeling uncomfortable about the owner or because of having bad experiences regarding the owner. The overall happiness of the tenant will mirror straight to the decision if they are going stay renting the place or if they have an urge to move out of the place they are living in. Lastly is maintaining the property. The maintaining of the property is on the shoulders of the owner, so the investor needs to make sure that they have a good maintaining company to take care of the property so everything will run smoothly with the tenants and they will stay happy with the services that they are being provided with. (Reedy 2021.)

To conclude, the overall happiness of the tenants and the well being of them while getting good service and being happy with the place they are living is the main factor to keep them renting the property. So when all of these things listed in the text above are being accomplished, this will assure you the highest occupancy rate in your rental investment property.  (Reedy 2021.)

3      PROPERY DETAILS

3.1      Leasing Income

Lease income is the income from the use or enjoyment of retail spaces under a real estate asset (Law Insider). Lease income can also be referred to as rental income and is received by the allowance of an individual to use your property, vehicle, or other assets in exchange for money or other benefits of monetary value. Rental income sources can be flats, houses, timeshares, cars, caravans, boats, machinery or equipment. The income also includes the total of all other payments that are received from a tenant such as money towards bills like water or rent on parking spaces. Security deposits are not included in lease income. Income received from subletting is considered rental income. Subletting refers to when you are the tenant but allow another individual to use your rental property whilst charging them rent. (Vero.)

Leasing income can be tracked through a method of lease accounting which is the process of a company recording its financial impacts of its leasing activities. For certain leases there are specific classification requirements and these must be recorded on a company’s financial statements being the balance sheets, cash flow statements, and income statements. A balance sheet tracks a company’s assets, liabilities and shareholder equity and it must always balance. A cash flow statement is used to show the movement of money as it moves in and out of a company during a specific time frame. Income statements are to track the income and expenses of a company over time. There are two different types of lease classification and they determine the type of account a company should use for its leases in its financial statements. The first type of classification is an operating lease which is a lease that does not present the lessee an opportunity to gain ownership over the asset. The second type is a financing lease which was formerly called a capital lease. A financing lease is the type of lease of which the lessee has reasonable expectation to gain ownership of an asset. (Cote 2021.)

3.2      Property Maintenance

Property maintenance is the practice of ensuring a building and its environment are in optimal condition by carrying out safety checks, cleaning, garbage disposal, rodent control, landscaping, gardening, and asset repairs. Occupancy standards are enforced by the law and benefit in retaining investments. General building maintenance is the action of executing checks that the buildings and its utility systems are safe, working and habitable. Building maintenance excludes the upkeep of the environment surrounding the property. The maintenance of buildings includes repairs on elevators and HVCAs, ensuring roofs, doors, walls and windows are in excellent condition, maintaining utility systems like plumbing and electrical services, and cleaning surfaces such as the gutters, windows, handrails, floor, and bathrooms. These activities can be prioritized based on importance and urgency. Managing property can be done either alone, or by an in house maintenance team, or outsourcing from a commercial property management company. (Eisner 2022.)

When owning or managing a residential property it is imperative to stay on top of all issues as well as any potential issues to ensure the occupants remain safe and satisfied. Property maintenance can be defined to not only be reactive maintenance but also preventative in which action has been taken to ensure a property is fully functional as well as operating in its best condition. Property maintenance includes maintaining landscaping servicing and repairing HVAC systems performing pest control, or cleaning or painting common areas. Another component of property maintenance includes safety inspections due the liability malfunctioning equipment or unsafe conditions poses. By effectively maintaining a property, the likelihood of equipment breaking down and failing reduces through regular checks to ensure the most costly equipment is operating as optimally as possible. A well maintained property can contribute to an increase in the property value through its ability to retain its market value. If a property is suffering from neglect, it will decrease in value and detract from rental prices. However property maintenance can be quite a costly expense and alongside this by outsourcing a property maintenance company to professionals results in having less of a say in which assets are insected, repaired, or updated. Buildings that would require property maintenance include apartment complexes or condominiums, retirement homes, and hotels. (Wu 2021.)

3.3      CapEx Works

Capital Expenditure, also known as CapEx, are the funds that are used by a company to acquire, maintain or upgrade physical assets. Physical assets include buildings, property, plants, equipment or technology. Typically CapEx is used by companies to undertake new projects or investments. Examples of making capital expenditures on fixed assets include purchasing a piece of equipment, repairing a roof, or building a new factory. The aim is to broaden the scope of a company’s operations or add future economic benefit. The amount a company invests into not only existing but also new assets in order to maintain or grow the business is demonstrated through CapEx. A CapEx is an expense that a company has capitalized or is presented as an investment on its balance sheet rather than expenditure on its income statement. In order to capitalize an asset, the company is required to spread the cost of the expenditure of the assets useful life. (Fernando 2022.) Useful life meaning the estimate of the number of years an asset is likely to remain in service for the purpose of generating cost-effective revenue in accounting (Kenton 2022). The amount of capital expenditures a company is likely to have is dependent on the industry. The types of CapEx each serve different values. Buildings can be used for offices, storage of inventory, manufacturing goods, or other purposes. In regards to land, it can be used for further development. Other types of CapEx include patents, furniture, vehicles, equipment, and computers or servers. Capital expenditures are a less predictable type of investment. Typically capital expenditures are not directly tax deductible however they can reduce a company’s taxes as a result of the depreciation it generates. (Fernando 2022.)

By investing in or improving assets, resources, and IP, a company is able to accelerate their growth. CapEx is commonly used by larger businesses to elevate their market share and take their commerce to the next level. CapEx and OpEx are often used interchangeably however they are different. Their differences being that a capital expenditure is a one-time cash outlay and is not recurring and therefore impacts a long-term asset. It is something that cannot be deducted fully in the year that it was bought. Operating expenses are typically deducted from revenue as an expense and the profits that are remaining are invested in CapEx in order to construct future growth and opportunity. During the calculations of capital expenditures the concept of ‘useful life’ is important as it refers to the estimated and generally agreed shelf life of the specific business asset. A CapEx is a long term investment hence its importance that the investment has a useful life of one year or more. CapEx investments have to fall into categories to be qualified as such. These categories are acquiring, or buying, a fixed tangible asset, upgrading an existing asset, renovating an obsolete, repairing an asset, adapting an asset for a new use, or starting or acquiring a new business. Capital expenditures can be calculated by the formula:

CapEx = PPE (current period) – PPE (prior period) + Depreciation (current period)

With PPE referring to “property, plant, and equipment.” (Staff 2022.)

4      ESG REAL ESTATE FUND

4.1      ESG Real Estate Funds and what they are

ESG is an acronym for environmental, social and governance and is used to describe the manner of investing which prioritizes positive impacts on society in addition to financial returns (Emerick). Environmental, social and governances covers areas such as; climate action, carbon footprint, energy usage, air quality, waste management, greenhouse gas emissions, usage and contamination of water, impact on surrounding ecosystems, working conditions, human rights, health and safety, diversity and inclusion, employee relations, community betterment and engagement, stakeholder returns, ethical standards, quality of management, board structure and independent, financial strategy and risk management, cybersecurity and data protection, and transparency and disclosures (Davidman & Menist 2022). The sustainable factors of a company are analyzed by the investors prior to making an investment decision. An ESG-focused fund comes under the category of alternative investments due to the difference in its investment criteria than traditional funds. Within real estate, sustainability refers to a property or development project’s ability to maintain its environmental design, social and financial performance. REIT is an acronym for Real Estate Investment Trusts. An ESG REIT invests its assets solely in environmentally responsible properties or companies. In addition to this they include social responsibility into their operations. Within these funds it is imperative companies have good governance policies and practices to protect investors. There is a variety of sustainableREIT funds, where some are focused on green buildings, renewable energy projects or communities that have been underserved by traditional real estate markets. REIT’s are an opportunity for investors through their liquidity, diversification, and the income it provides through its regular dividends. There is also the benefit of price appreciation over time. REIT funds are an opportunity to improve communities and the environment whilst gaining strong financial opportunity and potential high return. ESG funds can also be referred to as a socially responsible investment (SRI) fund, ethical investing, or sustainable investments. These funds hold a tendency to avoid companies which have been involved in gambling, alcohol production and distribution, weapons manufacturing and adult entertainment. (Emerick.)

There are green REIT’s and ESG REIT’s which differ. Green REITs are a property company that solely focus on green building certifications or environmentally friendly buildings. ESG REITs are more comprehensive than green REITs, where a green REIT may have only some social responsibility policies. ESG REITs include social responsibility into all of its policies and practices. Meaning a company is not only environmentally friendly but also socially responsible. To be socially responsible focuses on its protocols and dealings with employees, customers and the community.  Prior to investing in an ESG REIT, investors have to consider what companies or properties the trust invests in. It is also important to remember not all ESG REITs are created equally. ESG REITs are used to build and support sustainable buildings whilst also cleaning up polluted areas and creating work for local residents. Within real estate, sustainability holds high value due to buildings being some of the biggest polluters in the world, accounting for nearly 40% of global carbon emissions. Alongside this sustainable investing can aid in reducing the health impacts that have been associated with materials and practices from traditional buildings. ESG real estate funds are a mutual fund or exchange- traded fund (ETF) and they invest in companies that have strong environmental performances, social and governance practices. (Emerick.)

Within sustainable investing there is the practice of a retail Real Estate Investment trust (REIT) which is when a company owns and operates income-producing commercial properties. Commonly retail REITs are sector focused and hold ownership over malls, shopping centers, and other types of retail property. Retail REIT investing can be beneficial in gaining exposure to the retail real estate market despite not directly investing into the malls and shopping centers. Retail REITs are further beneficial due to their being a diversified portfolio of income producing properties, provides access to industrial real estate, and the dividends that can be passed to investors tax free. In addition to retail REIT, there is also residential REIT which is a residential real estate investment trust and proceeds by purchasing and operating income producing properties. These properties are typical apartment buildings, office complexes, warehouses, or self storage units. Typically residential REITs are traded publicly on major exchanges. Within residential REITs, there are two types being equity REITs and mortgage REITs. The REIT that owns the properties that they are operating is an equity REIT. Mortgage REITs lend money to equity REITs and earn interest on the loans. Despite differences both REITs offer investors the chance to invest within real estate without having to purchase and manage individual properties. Alongside this they also provide opportunity for liquidity. Liquidity is the ability to sell shares quickly and at a fair price. There are also healthcare REITs which focus on healthcare properties such as managing hospitals, nursing homes, assisted living facilities and other medical properties and can be either public or private. (Emerick.)

4.2      ESG effect on real estate funds

ESG real estate funds are increasing in popularity due to the fact that investors are seeking to align their money with values. These funds have positive environmental and social impacts and therefore they provide strong financial opportunities whilst also aiding in the improvements of communities and the environment. ESG REIT funds are popular amongst investors due to their ability to provide strong investment opportunities in addition to high potential returns. These funds are attractive for investors who want to leave a positive impact on society whilst making their money work for them. (Emerick.) ESG is commonly becoming a more prominent practice and vital criterion for investment within real estate. According to the 2019 PERE ESG Investor Survey, 70% of institutional real estate investors hold explicit ESG policies. These policies and ESG principles have a key role in shaping investment decisions. Capital providers are looking for climate data and disclosures alongside resilience, proactiveness and ability to attract tenants. ESG has the ability to attract new investors that look for more comprehensive risk, opportunity and impact analysis as it continues to be at the forefront for investors. ESG is an opportunity to gain a competitive advantage whilst mitigating risks and exposures and improving financial performance and investment to grow in attractiveness to investors. (Davidman & Menist 2022.)

5      CONCLUSION

To conclude, real estate portfolios are used as investors resume which displays how the investors investments have been performing. The portfolio has a lot of attributes that the investor must be aware of and must look out for the portfolio to be up to standards. For the investments to be profitable when investing to rental properties the investor must be on the lookout for information like the occupancy rate. In addition to this when the property is occupied it is important to keep a good relationship with the tenants. The maximization of these things assures that the effectiveness of the investment is as high as possible and brings in the most amount of profit. (Brock 2023.) In addition, within the magnitude of whole corporations there are investments done in the ESG funds which hold a positive impact to the society in them and are sustainable. These funds are a growing trend in the real estate investment industry due to investors looking for investments where their values are aligned with their money. This leads to some properties having a competitive advantage over others with their sustainability. (Emerick.)

REFERENCES

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https://www.eisneramper.com/esg-impacts-real-estate-funds-0722/

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https://www.fortunebuilders.com/building-substantial-rental-portfolio/

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https://www.reedyandcompany.com/blog/8-strategies-to-improve-the-occupancy-rate-of-your-rental-properties/

Richardson, S. 2023. Types of Real Estate Investments: Everything You Need To Know. Read on 8.3.2023  https://www.rocketmortgage.com/learn/types-of-real-estate-investment

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Wu, W. 2021. What is Property Maintenance?(+Definition, Benefits, Examples). Read on 8.3.2023. https://coastapp.com/blog/property-maintenance/