Is Real Estate a Good Investment?
It is a question real estate agents hear a lot. A good investment is considered profitable, but admittedly, not all investments are appropriate for every investor. It depends on what you are looking for, but there are few characteristics to consider. It is its safety, demand, predictability of outcome together with your risk tolerance and financial objectives.
Real estate is land and all the permanent improvements attached to it, whether natural or artificial. There are five main categories of real estate: residential, commercial, industrial, special use, and raw land.
Real estate investing involves purchasing, owning, and managing a home, rental or other property, or indirectly through a real estate investment trust (REIT). Real estate investment trusts own or finance income-producing real estate across various property sectors, like a mutual fund. It is basically dividend-paying stocks.
In general, real estate is a long-term investment, which can generate significant returns most of the time. However, how much you pay, how much increase in value, how long it takes vary with the intention of the purchase not to consume it but rather to use it in the future to create wealth. It is ideal to openly talk about concerns related to time, capital, and efforts in the hope of a better payoff than what was initially put in.
To answer the question, here are the reasons why real estate is a good investment.
Portfolio Diversification
As an investor, it is essential to diversify your investment portfolio. If you decide to put all your eggs in one basket, you could suffer from a terrible total loss in one snap. But if you spread your funds across the stock market, bonds, and real estate, you increase your chances of higher earnings and lesser losses.
Real estate has a low correlation with other major asset classifications. Adding real estate into your portfolio can lower its volatility and provide a higher return per unit of risk. With it, you can minimize risk by holding on to your property longer if there is a price drop. It is a way of building equity – an asset that is part of your net worth.
Leverage Your Investment
Many people are hesitant to invest in real estate. One reason is they thought that investing in real estate requires a considerable sum of money. But they are wrong, and here's why.
In real estate, you can put down a fraction of the home's cost to start. For example, you found a home for $100,000. You can shell out as low as $10,000 and find a loan to finance the rest of the amount. As a result, you can get the house you want to buy with a 10% down payment – that is leverage.
You can slowly pay your mortgage over the years, and it increases your rate of return not only by paying the mortgage down but also with a natural appreciation of real estate. This scenario is possible as long as you have good credit and a stable income.
Force Appreciation
The term appreciation in the real estate industry refers to the increase in the property's value over time. Unlike stocks or bonds, it is possible to force real estate property to appreciate. It sounds absurd but making renovations or repairs can boost the rate of appreciation.
You can work with a licensed appraiser or real estate agent to determine what renovation can increase a home's value. It does not have to be major as long as it contributes to the totality of the property. It can be an additional partition like adding a room or finishing the basement. Identify what you can do to drastically and positively affect the unit's worth.
You can turn a profit when you sell it or lease it since rents tend to rise over time, leading to higher cash flow.
Source of income
Real estate investments offer more options than other types of investments.
Fix-and-Flip Project
It is when you buy an undervalued property, make substantial improvements, and then sell it. This process is quite expensive since you have to hire a contractor to oversee labor and purchase materials for the remodeling. But one significant advantage in flipping properties is realizing gains quickly when it is sold.
Buy-and-Hold Approach
It is when you buy a property where you hold on to it longer. You can rent it out while waiting for the market value to increase. It can be a source of passive income where you can earn monthly cash flow since you do not rely solely on the appreciation.
But unlike other investments, real estate is dramatically affected by location because it is one of the most important economic characteristics of the land. Other factors such as employment rates, local economy, and accessibility can drive prices up or down.
Is Real Estate Investment Safe?
Real estate is generally safe and lucrative when you buy a property at the right price in a location where the value is sure to rise. It would be ideal to be knowledgeable about the neighborhood and the latest developments around the vicinity of the property you are eyeing before giving it a go.
Mostly, the reasons why real estate investments are safe:
High Tangible Asset Value
Even though no market is insured against collapse, including real estate, you have something physical to hold on to if you decide to invest in real estate. Unlike stocks, if you lose money when investing in stocks, you will be left with nothing when you choose to sell your stocks lower than your purchase price rather than wait to recover paper losses.
Expected To Increase in Value Over Time
Given that real estate markets are relatively stable, history proves that the long-term trend is that prices will always escalate. It is considered to be the safest investment strategy over some time.
Helps Reduce Risk by Providing Diversity To an Investment Portfolio
As mentioned, the housing market is less volatile than other investments like stocks, where prices fluctuate rapidly and unpredictably.
Tax Benefits
One of the primary tax advantages is the ability to deduct certain expenses relating to the investment property, including property tax, insurance, management fees, capital improvements, etc. Another is depreciation which is the method of deducting a property's loss in value over its expected life. It is an accounting term that means the decrease in value from average use known as wear and tear, and it is a non-cash expense.
Conclusion
To sum up, there is no guarantee that you will consistently profit when you have real estate investments. Like any investment, it does not automatically ensure that you will make money or fully preserve your capital. Understanding is key in exploring opportunities to gain and enhance potential returns while lowering risks as an investor. Keep in mind your overall financial plan because it is your compass in choosing the products which can help you achieve your dreams.
If you plan to invest in real estate, think about the period, how much money you are willing to invest, your risk appetite, and your financial goal. Real estate investments offer steady income and capital appreciation, in addition to portfolio diversification and investment that be bought by leverage. However, it is a non-liquid asset since it would take months for a person or company to receive cash from the sale. It is influenced by local factors, requires a more considerable initial capital outlay, and may require active management.
So, before you jump into real estate investing, research the property carefully. Ask advice from your trusted real estate agent or broker. You can start small when you finally decided to get your feet wet. For example, you can purchase duplex units. You can reside in one unit while renting out the other. It is a great way to start slow and simple for you to be more familiar. As you begin to discover more about this type of investment, determine if it is the right one for you. The most important thing is you enjoy what you do aside from building your wealth. Remember that investing is the most reliable way to be financially independent, and investors are rewarded for taking bearable risks.
If you are a real estate agent, you can easily qualify as a real estate investor. One better way to convince potential clients is to be an investor yourself. Experience is the most excellent teacher, and with it, you can share your insights and knowledge about it. You spend your days assisting and facilitating real estate transactions, so you have a better understanding and access to all the best deals.
Overall, real estate investing can be pretty simple once you understand the fundamental factors of the investment, how it works, economics and risk. But keep in mind that "simple" does not mean "easy." Mistakes could lead you from minor inconvenience to major disasters.
“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”