I recently wrote an article that has been of interest to many real estate investors. I live in Toronto so I figured this is the best place for me to post :)

I hope you enjoy it and it assists you in your investment options in real estate.. be it real.. or virtual! :)

Table of Contents
- Advantages of Real Estate Investment
- Disadvantages of Real Estate Investment
- What is Virtual Real Estate?
- The Advantages and Disadvantages of Old Single Model Virtual Real Estate
- The Advantages and Disadvantages of New Multi Model Virtual Real Estate
- Conclusions

Throughout history the value of real estate and the laws and regulations surrounding it have evolved. What is great about this evolution, is that it creates new opportunities for discovery and adaptation of the market.

Not long ago there was a fluctuation in the real estate market that shook many in the industry and changed the perceived value and investment protection put into real estate today. Once again, this has created opportunities for those who can see them, while causing others to run for the hills.

Advantages of Real Estate Investment

The case for real estate, as an investment, has many attractive qualities. It also has some drawbacks. Some of the more commonly understood benefits include:

- Creating a diversification of your profile that is documented as part of your assets.
- Returns on investment from tenants that keeps ahead of inflation
- Performance improvements can be done to increase the value of your real estate. This is very popular with purchasing low cost low value properties and with a few improvements significantly raising the value and then selling. Because of this control over the investment real estate, it is often preferred over other investment models.
- Lending institutions favor real estate investment, making such investments easier to access for more people (though this has recently taken a downturn in the mortgage lending market as you can see here: Declining Lender Market for Real Estate)
- Income potential is rather high with deals that can range anywhere from $5000 upwards to $150,000 in a single transaction.
- It is a socially accepted investment which provides status among peers within any social circles and all classes.

The last point is something that many do not consider. However, for the sake of this comparison it is an important element to note, as there are emotional attachments that are culturally instilled to make real estate a more attractive proposition.

Disadvantages of Real Estate Investment

While these benefits are rather well known, there are other aspects to real estate that have drawbacks. Some of the more commonly understood issues include:

Cost of Buying, Selling and Operating – Compared to other investments, the cost of transactions within real estate are high when dealing with private real estate (the more common market). Larger transactions can have payments differed, but must be paid nonetheless. The ownership of real estate, of course, also means maintenance because just like all things in this world, it requires upkeep. When dealing with rental properties, there is the added risk of tenants damaging the property which will increase the cost of your investment.

Ongoing Management – With any real estate you are dealing with how it will be handled as an investment, as well as managing all the other day-to-day issues of the property. Using a company to take care of this for you or doing it yourself, either way costs you time and money.

Acquisition Difficulties – As many of you already know, you can spend a great deal of time looking for the right types of properties to acquire. Once found it can be equally as difficult to complete the purchase when others may also have interest in the real estate. To have real diversification of your real estate you need to have locations that are geographically far apart, which can also be difficult to handle.

Market Cycles – Just like most investments, there are cycles within the real estate market. These cycles correspond with those of the leasing and investment markets. Of course this all happens with variations in supply and demand which can vary with any number of economical factors within a given region. A city or town may have its entire economy powered by one or two big companies that may close down or experience downsizing which in turn throws the leasing market. The investment cycles recently experience changes based on the investment markets that affect property prices. Both these cycles of course impact the decline and growth of rental properties along with investment properties. The bottom line to these cycles is timing. Good and bad timing can make or break fortunes.

Measuring Performance – Measuring the risk and performance of your real estate can be very difficult where there are no real accessible benchmarks for comparison.

Money Pit Syndrome – Without due diligence, the emotional elements of investing in real estate can often cause people to invest in properties which they think will sell quickly, only to find that they do not move as they had hoped, or the market cycle mentioned above affects their position. Then one is left paying an additional mortgage which they will struggle to maintain. This situation often results in foreclosure, after an extended period of loss.

The last point is the most common hazard that occurs within the real estate investment industry. While we like to think that we make investment decisions that are purely driven by logic, reason, and numbers, it is often more human elements that, in the end, make our decisions. The more successful investors are those who have learned to put aside the emotional and social markers that affect most; they see opportunities for what they are, make assessments accordingly, and so have greater odds of success.

Typical Example of Real Estate Earnings:

Rental property

$10K down payment for financing
Mortgage $500 a month
Tenant Pays $800 a month
Profit $300 a month

Multiplied by 10 properties = $3000 a month profit and a real estate asset value increase or decrease depending on lease hold improvement requirements with tenants

Investment property

Real Estate Purchase Value $150K
$15K down payment for financing
$10K invested in improvements
$6K to cover mortgage during improvements and selling period (hopefully 3 months)
Sell for $190K
Gross Profit $24K
Minus fees of approximately 5% ($9500)
Net Profit $14,500

Multiplied by 5 properties per year = $72,500 profit before taxes and a healthy relationship with financial institutions, assuming each investment property moves within the given period of time. I knew one investment property owner who sat on over $2 million in properties for over a year and lost all their capital due to the market not moving to buy and ended up losing their entire investment.

These are just examples which can scale to any amount you might be dealing with, whether property values are lower or higher, though it is understood that bigger deals yield higher returns.

What is Virtual Real Estate?

Recently, with the advent of the Internet, a new type of real estate opportunity has emerged. Prime locations on the Internet have become more valued than some of the most coveted properties in the world. All of this has taken place, for the most part, in only the last decade. When comparing this new market to the real estate market, which has existed since the beginning of time, we are dealing with a new born.

What has been most prevalent in the media has been the big movers which have gone from private to publicly traded companies. Search engines have garnered much of the media’s attention for their capability to gather and direct people to the sites with the information, products and/or services they are seeking. With this enormous control, they have gained capital investment in the billions. Other major sites on the Internet are given value based on either a particular service offered, or on their ability to generate revenues.

For the past few years the news media has started to point out the billions of dollars that are moving away from traditional bricks and mortar business towards the online world. The rate of connectivity people around the world are gaining each day continues to multiply and new products and services are being introduced to make the virtual world more accessible and integrated with every aspect of our lives. Any person of any class or education level can readily see the growth of the Internet and how it is impacting all industries.

The virtual real estate value of some of the top sites on the Internet, such as Wikipedia and Facebook, have already been assessed in the hundreds of millions. While other smaller sites can’t boast such numbers, make no mistake, they can still carry a high value.

Some real estate investors have seen what has been happening in the virtual world and recognize the opportunities it presents for creating new sources of income. The problem many have faced has to do with taking ‘real world’ concepts and applying them to the online world. Often times sensible business practices are thrown out the window in favor of new approaches, only possible online, which many believe will be more efficient there. Many forget, however, that in the end you are dealing with people, not ‘visitors’.

Within the virtual real estate world the traditional method of building value and market worth has usually been done by building a single project that attempts to engage its visitors either in commerce or by providing a value service to its members. While this has worked well for many, the issue that others consistently face when creating new projects like this has been being able to generate enough traffic or gain enough members for the project to be profitable. This, much like the real estate market, is often hit or miss.

Just recently however, with the advent of new technology, it is possible to own, operate, and manage hundreds, or even thousands of virtual real estate properties. As illustrated by a conservative portfolio manager in a recent press release (US Stock Investors Find Shelter in Virtual Real Estate…). The ability to own larger portions of virtual real estate, which are given value through their ability to gain traffic from search engines and social network technologies, creates a new dynamic which calls for investors to rethink the way they perceived investing in online real estate.

Even though we are dealing with such a young market, there are clearly two forms of virtual real estate that are available to investors now. These two forms I will refer to as the ‘single’ and the ‘multi’ models.

The single model involves a single virtual real estate where all resources are focused and all value is made. This is what most people are familiar with and have experience in. With the single model you are involved in a single topic and have a single source of revenue. Typical examples of this can be seen in business owners, who have existing bricks and mortar real estate, setting up a virtual duplicate. Methods of creation usually are long and complicated and require hiring a professional, a contract company, as well as a consulting firm in some instances.

The multi model involves a network of virtual real estate which span multiple topics and focus more in providing simple resources on specific topics of interest. With the use of automation and utilizing various sources of revenue, the multi model involves hundreds of thousands of virtual real estate which bring in smaller amounts of revenue that all together, add up to a surprisingly large revenue source. Multi model also utilizes easy to use technology and support making it accessible to anybody with little to no background in the virtual world.

The Advantages and Disadvantages of Single Virtual Real Estate Model

Advantages:
- Low entry cost.
- A single virtual property is easy to manage.
- ROI can be realized within six to twelve months.
- Improvements are less costly.
- Value is determined by traffic and dollars and not market movements.
- Maintenance and ownership costs are low, reducing risk.
- No barriers to entry, licensing requirements or regulations to deal with, so long as you are not involved in spam email, pornography, or distribution of copyright protected goods such as music.
- Income potential limited only by the demand of your particular virtual real estate offering which can range from $2000 to $500,000 per month in ongoing income.

Disadvantages:
- Single source of income.
- Easily attract competition that will detract from your virtual real estate’s value.
- Getting traffic to convert to monetary value can be difficult
- Server uptime and having a necessary growth path in place often fails, effecting the single source of income.
- No significant asset value to show as part of your documented portfolio until you make an IPO.
- Socially unknown and often not accepted as a practical investment or source of income.

While the advantages and disadvantages are almost equal in number, the disadvantages are light when compared to those of conventional real estate. The two factors that tend to matter most to people are mainly emotional ones which relate to the last two disadvantages regarding what you can report on your asset portfolio, for status, and what you can talk about with your friends, in seeking social and peer acceptance.

Though virtual real estate is all around us and being used everyday by nearly everyone, it is still largely unfamiliar to many. For this reason, many respond with jest when one attempts to explain its advantages over traditional markets, which are now in a state of flux with the introduction of virtual market.

The more serious disadvantages are the single source of income and the attraction of competition. A recent example of this might be seen in the social networking world where MySpace came on the scene and introduced social networking via the medium of music sharing interests. Competition soon came in and overtook its position, but not before the owner of MySpace was able to cash out on it for $580 million. The next competitor up was Facebook who just last year was offered $1 billion by Yahoo, and rejected it with the expectation of getting more in the future.

This happens on a smaller scale in more specific markets as well. Young upstarts will attempt to create a new virtual real estate, but are quickly duplicated by others. The only good news is that those who copy often lack the ability to properly manage, maintain, and improve their virtual real estate and their duplication attempts fail.

Attempting to start multiple single virtual real estate models often ends in failure due to resources being divided between all of the virtual real estates and not allowing any of them to break ahead and gain the share of traffic and monetization necessary to increase their value. A recent book was published called ‘The Autumn of Multitaskers’. This work points out how attempting to manage multiple real estate (or anything for that matter) like this can turn into a disaster, if not for all, at least for one of your virtual real estates.

Due to technology limitations, up until very recently, these disadvantages to the virtual real estate market in the single model structure persist. With the multi model approach, there is a more distributed approach to virtual real estate that has proven to be very effective in overcoming almost all the disadvantages of the single model.

Typical Example of Single Virtual Real Estate Earnings:

Virtual Real Estate Investment (web development, domain, hosting, etc) - $3000
Maintenance (hosting, updates, marketing) - $200 a month ($1200 for 6 months)
Income from advertising or product service sales after 6 months - $2000 a month
Profit - $1800 a month
ROI within first year

Multiplied by 5 virtual properties = $9000 a month profit and with only cash for asset value which can increase or decrease depending on competition and market value of given advertising, product, or services.

The Advantages and Disadvantages of Multi Virtual Real Estate Model

Advantages:
- Low entry cost.
- Multiple diversification of sites with automated management.
- ROI can be realized within one to three months.
- Diversification of income sources including advertising, product and service affiliate sales, and other monetization sources.
- Value is determined by traffic and dollars and not market movements.
- Maintenance and ownership cost is low, reducing risk.
- No barriers to entry, licensing requirements or regulations to deal with, so long as you are not involved in spam email, pornography, or distribution of copyright protected goods such as music.
- Automation tools handle traffic promotion to ensure ongoing value increase.
- Income sources from thousands of sites in smaller amounts that add up to large income.
- Scale of numbers makes it nearly impossible for any competition to gain position over your virtual real estate.
- Multiple servers and site distribution ensures that if one server goes down the rest of your virtual real estate is unaffected and income sources continue.
- Income potential diversified into smaller amounts per virtual real estate, enable earnings of approximately $750 per 100 sites per month ongoing which can be scaled by factors of ten to make as much as $30,000 per month ongoing.

Disadvantages:
- No significant asset value to show as part of your documented portfolio until you make an IPO.
- Socially unknown and often not accepted as a practical investment or source of income.

The advantages are tremendous in the multi model. Many of the elements that exist in single model real estate as disadvantages are transformed into advantages in a multi model platform. The only reason this has not been possible until now is because the automation technology enabling the investor to gain holdings to this scale and maintain value in them was unavailable.

Typical Example of Multi Virtual Real Estate Earnings:

Virtual Real Estate Investment in 4000 sites (automation system, hosting, domains) - $6000
Maintenance (automation system, hosting) $6000 paid quarterly
Initial income from 4000 sites earning $0.15 a day on average = $18,000 a month
Income from advertising or product/service sales after 6 months ($0.25 a day avg. per site) = $30,000 a month
Profit - $30,000 a month
ROI within first month

No need to multiply these results with an average income of $300,000 a year after expenses. However, to multiply by 5 in similar manner results in $1.5milllion in profit income per month. With diversification of income sources and approximately 20,000 sites all generating smaller amounts of income, it is a more solid positioning. Automation tools now make it possible for any individual, even those lacking any experience in the industry, to have all the hard work that has prevented others from succeeding with this multi virtual real estate model done for them.

Conclusions

The case for virtual real estate over traditional real estate, especially with the new multi model now introduced, makes a strong proposition for investors to start looking at the virtual market as a frontier that should be considered more as a source for cash assets rather than portfolios which only appear impressive on paper.

Multi model virtual real estate carries the greatest potential returns with the lowest risks when compared to all other real estate investment opportunities available. There is currently only one program available offering this approach, as noted in the referenced press release above. Because of this, it is a limited resource that hopefully, in time, will become more accessible to other investors. Those that manage to gain their position in this new multi model virtual real estate industry are sure to reap the greatest rewards that always come with being among the first movers in an industry.

The good news is that only those with the emotional maturity to assess the advantages and threats of this new multi model virtual real estate opportunity are those who will make their move, making the rich richer, and the rest wondering how they missed what was right in front of them.

By Jonathan Tranter

References:
Declining Lender Market for Real Estate – http://ml-implode.com
The Autumn of Multitaskers – http://www.businessweek.com/the_thread/blogspotting/archives/2007/10/autumn_of_multi.html
US Stock Investors Find Shelter in Virtual Real Estate… - http://www.prwebdirect.com/releases/2007/8/prweb549041.htm