Investing in real estate is a means to build wealth by renting and selling properties. As an investor, you can invest as little as 10% or more than 100% of your time, money, and skills in real estate investments. These include residential rentals; commercial office space; apartment buildings; storage facilities; raw land and undeveloped land (for new construction); commercial property such as retail establishments; golf course communities; recreational campsites (in US/Canada); mobile home parks (in US/Canada).
Real estate has higher appreciation (asset growth rate) than stocks (2 to 3 times) and bonds and lower risks than stocks and bonds. The appreciation rates are higher when you buy at the right time and price; in good locations with the intense competition; the property condition is good; the market where you invest is not volatile. When you sell, another investor may pay more or less than you.
The Risks of Investing in Real Estate
1. The risk of buying the wrong property
You can make bad investments by buying properties with poor potential for appreciation; location and condition; low demand for the type of property you have purchased, or even due to negative factors such as a natural disaster that affects the whole area. The other risk you can face is that when the market value of a fancy condominium in your building increases substantially, the price of your unit may not be able to grow at all because it is unlike anything else offered in that complex. In most cases, you will want to buy undervalued properties in terms of market price and high potential value.
2. The risk of buying the right property
Real estate can be better than stocks and bonds if bought correctly and at the right time. It would help if you bought properties only where demand is high and competition low; where property values will go up; when you know you have a long-term commitment to keep the property; and on stable markets.
3. The risk from renting out a bad property
If you invest in the wrong property, you may lose more money than you made for your initial investment. It is because maintaining an old, poorly maintained building will cost much more than buying one new one. Your tenants can deduct the depreciation on their tax returns, but you must pay taxes on your profits. Therefore, you must purchase a property in good condition and desirable to your target audience.
4. The risk from lack of financing
Everything needs money to function. When you invest in real estate, you will need to finance your properties in one way or another. Most people need more cash to pay for a property, so they turn to banks and other lending institutions for loans. For this reason, you must develop good relationships with banks and other lenders so they will not hesitate to give you loans when necessary. It would help if you avoided less profitable or lower-quality properties so that you have more money to put into improving the quality of your investment.
5. The risk from local conditions
Your property can be seriously damaged in a natural disaster; for example, earthquakes, floods, and fires. In this situation, selling or renewing the lease and vacating will only be possible after it worsens. Your best option is to rent out the property before selling it at a loss, wait until you can sell it and make some money, or let your neighbors do repairs with your permission until the damage is minor, then sell it at a profit.
6. The risk from global conditions
The global economy goes through a significant cyclical process every few years. In 2008, the US real estate market entered one of the worst recessions in history. This same thing could happen in other countries as well. On top of this, potential political unrest can affect the country’s stock market. When investing in a particular country and region, having more than one property is better, especially if the area has a high risk of political corruption or violence.
The Rewards of Investing in Real Estate”
1. Low barriers to entry
It means you can get started in real estate investing with a small amount of money; hence, it is easier for an investor to build wealth by purchasing and renting out real estate than by buying stocks or bonds. You only need money for the down payment (amount invested at once) and the closing costs.
2. Profits are relatively short-term
The period for profits from real estate investments is usually a few years and sometimes only a few months. It is because most real estate investments are meant to put money from the first year of purchase into the hands of the investor and allow them to quickly move it into another property or invest it in stocks, bonds, or other forms of securities. Most investors are looking for solid investments that can be held for more than three years to generate steady and reliable income.
3. Diversification
Getting a return on investments in stocks and bonds can be challenging since the total amount of money invested is limited. Real estate is more diversified since you can buy many different properties, with little risk of investments in one market being adversely affected by another. Asset managers can purchase many other models and sizes of properties to help maximize gains while reducing risk. They can also buy properties with lower-than-average profit margins because they have a higher equity ratio than other investments.
4. The Investment in Real Estate is a Multi-Generational Asset
Real estate investments last for decades and will continue to bring money to your family. You can also pass down your property, stock certificate, or mutual fund account. However, most real estate investors prefer to avoid passing down their properties because they want to acquire as many assets as possible, so the assets go through generations instead of staying with one person for life.
5. Diversification across Countries
In addition to diversification across different pieces of land in the same country, you can also invest in real estate from other countries to help protect against risk. For example, if real estate in the US is starting to drop in value, investing in properties abroad may still be safe.
6. The Dividends
Most real estate investments produce yearly income that can be used to pay off associates and generate profits that can be distributed throughout the economy. There are, in fact, several types of income you will receive from real estate investments: net operating income (NOI), gross revenue, and passive income. All three of them are essential parts of your overall investment strategy. Net operating income is the amount left over after deducting all building costs such as insurance, property tax, maintenance fees, etc. Gross revenues are collected from rent, fees, and fines. Passive income is the residual amount left after selling the property or finding a new investor.
7. Diversification of Investments
Many real estate investments can be made: to purchase a single building, multiple buildings, land, or commercial properties. You can also choose to buy real estate for long-term investments or short-term leases, depending on how you want to invest in it. Also, you can invest in real estate stocks representing shares in an investment fund instead of directly buying into the properties themselves.
There are many forms of investing, but most come down to real estate investing. The significant ideas about real estate investing that have been established are based on selling your property and the amount of money you invest. It is a profitable and sound investment, but it still requires much work to make it happen. Using the internet will help you find a lot of information about buying and selling properties and finding people who want to buy your properties. Besides that, you should also have an entrepreneurial spirit for this venture to succeed.
