Gone are the days when only the rich and famous could invest in real estate. Now, anyone can do it, even if they have money for a single down payment. With the appropriate amount of research and preparation, anyone can enjoy the multi-pronged benefits of real estate.
But why should you?
Even though we’ll get to that, here’s a concise answer: to diversify your portfolio and have a secondary income stream.
Not satisfied with the answer?
1. Usually, Values of Real Estate Appreciate
If you invest in a property for long enough, there are chances its value will start to appreciate. While global catastrophes continue to happen (like the 2008 housing crisis), they aren’t common. On most occasions, the value of buildings and lands appreciate and make your investment grow.
But if it appreciates slowly, you can also increase the pace of renovating the property. Whether you’re buying an undervalued property or fixing it up to sell, you can increase its value more effectively than natural appreciation by repairing it or adding few pieces of furniture, or just by enclosing the patio. This will give you an even better return on your investment.
2. The Cash Flow of Property Investments Is Predictable
With most investments, you can’t predict the cash flow you’re going to receive. But when you invest in real estate, you’ll always know the cash flow you can expect if you know the rent you can charge and a tenant willing to pay it. As long as the property is occupied, you can bet that money will land in your bank account every month.
However, remember to budget for repairs and routine maintenance. Making them a part of your annual expenses is essential. But if you don’t want to manage and find tenants yourself, you can hire a property manager who’ll do it for you.
3. It’s A Great Plan for Retirement
Your investments in real estate aren’t liquid. This means you’re putting money into it for the long run. As time passes, you start to earn more equity in your home. When you enter retirement or are nearing it, you can sell your property and use the profits to surf through the retirement life by finding rocks that have value or just going on international trips. While many may call it a forced plan for retirement, you aren’t putting away money into a retirement fund!
Unlike a retirement fund, you can also rent out your property to cover all of your renovation needs for a year. But before you decide to sell the property, discuss your case with your tax advisor. This will allow you to minimise the tax liabilities when it’s time to sell the home. Since it won’t be a principal residence, you won’t get capital gain exclusions, but there are other ways to reduce tax liability.
4. Earning Passive Income
One of the biggest reasons property investment is so popular is that it’s great for generating passive income – both in terms of monthly rental returns and capital appreciation.
When you also employ the services of a property management company, it can be a relatively hassle-free venture, as they can take on the bulk of your responsibilities as a landlord.
With a huge jump in house prices and demand over the past two years, property value, in general, has likewise seen a considerable increase – with there being no apparent sign of it slowing down soon. In the UK, for instance, the property market is performing relatively well, with mainstream house prices expected to rise 13.1% by 2026.
Out of all the assets you can invest in, real estate is perhaps one of the best (if not the best). After every year, it’s going to get you one of the highest returns in your portfolio. If you do it right, you may end up retiring sooner than you imagined.
5. Building Equity in Real Estate Investments
When you invest in houses, your equity increases the longer you own the house. A home’s equity is the part you straight up own – as opposed to a part that a bank or any other financial institution may own since you’ve taken out a loan. When you start to pay off your loan, your equity starts to grow.
In the rare case the market takes a downturn, there’s no need to worry. They are usually temporary, and you should hold on to your property until the market stabilises. Once it does, you can continue building your equity. Over the years, as the value of your house continues to increase, you get additional equity.
The Potential Problems with Real Estate
Even though real estate is a brilliant option for an investment, there are still many ways things can take a downturn.
Underestimating and Overestimating Expenses
Real estate investors – and this includes entrepreneurs – are fairly optimistic. While that is important, being excessively positive can lead to a real estate investment blunder. When you’re estimating the expenses for your real estate investments, incorporate the following two factors into your calculations:
1. Bad debt, and
2. Market vacancy
They will reduce your projections to a realistic number, and you can also allocate 15% to 20% of your rental income to monthly expenditures.
Thinking Appreciation Is Mandatory
Several inexperienced investors think prices only go up in the real estate market. Even though they do go up, it’s not that simple. A graph that shows a comparison of property prices between 1980 and 1985 may indicate a definite rise. But if you compared property prices between January 1980 and February 1980, you may not see that much of a difference.
There are peaks and valleys, but the trend has always favoured appreciation. However, buying a property and thinking it will appreciate immediately is a bad idea.
Managing Your Property
If you’re new to the world of real estate, the idea of cutting corners to save money may seem tempting. People often try to manage their property themselves, which is usually not a good idea if you’re not familiar with the processes involved.
An experienced property manager can handle stuff like tenant issues, increasing the market value of your property, or dealing with vendors on your behalf.
The Bottom Line
If you haven’t considered investing in real estate before, now is the time you should. There are plenty of opportunities for investors to buy properties, but if you want to build one, companies like Buildi can help you find the perfect builder for the house of your dreams.