[Practical Finance] Cautions for Income-Generating Real Estate Investment... Avoid 'Blind Investment'!

New Towns and Housing Sites with High Future Value
Long-Term Perspective Needed as Commercial Area Stabilization Takes Time
Avoid Oversupplied Areas and Prepare for Interest Rate Hikes

Income-generating real estate requires more specialized analysis because the investment purpose is not simply to gain capital gains like apartments, but to secure stable rental income. The biggest reason why income from income-generating real estate falls short of expectations or even results in losses is when vacancies occur. Regardless of vacancy status, fixed management fees continue to be paid, and if a loan has been taken out, interest expenses are also continuously incurred. If a certain level of income is not guaranteed, below-expectation returns can lead to significant long-term losses.

Therefore, experts advise that when investing in income-generating real estate, it is necessary to ▲distinguish between good and bad properties ▲avoid blind investments ▲prepare for interest rate hikes.

Commercial properties and officetels in newly developed areas such as new towns or housing development districts tend to have high future value due to many development benefits. Since these areas are planned and developed with specific purposes, they usually have many mid- to long-term development factors. Additionally, there is a large influx of residents and office workers, resulting in abundant demand and prominent future value.

Nevertheless, income-generating real estate in new towns or housing development districts is generally classified as high-return, high-risk products. Especially since apartment move-ins in new towns occur in phases, it can take at least 4 to 5 years to achieve the desired returns, and it may take 7 to 8 years for commercial districts to reach maturity. This requires a long-term perspective.

In particular, ‘blind investments’ should be avoided. In the past, income-generating real estate mainly consisted of commercial buildings or officetels, but now it has diversified to include urban lifestyle housing, residential lodging facilities, and knowledge industry centers. As new products emerge, investors often rely on investment analyses presented by companies. Therefore, it is crucial to develop the insight to find investment destinations that can secure ‘safety’ for steady income generation so that invested funds do not stagnate but generate returns.

There are frequent cases where investments are made simply because prices are low, but no profits are made, resulting in losses. A representative example is oversupplied areas. Even if an income-generating property is in a prime location, if supply exceeds demand, it will inevitably be difficult to secure tenants or rental income will significantly decrease.

Recently, with the Bank of Korea raising the base interest rate and the rapid increase in market interest rates, along with concerns about domestic economic downturn, experts advise caution regarding real estate purchases through excessive loans. In other words, the lower the loan interest rate, the more leverage can increase returns, but when interest rates rise, deleveraging effects inevitably increase. People investing in commercial buildings, officetels, or urban lifestyle housing often use bank loans to some extent, and when loan interest rates rise, a significant portion of monthly rental income will be offset by loan interest.