Real estate has generally been one of the most reliable investments you can make, offering both security and good returns. It can also be one of the most interesting, as it offers a slightly more practical approach. Although there are many ways to invest in real estate, you probably have a tangible asset, you can see and visit your investment property. You can even participate in the management of your property. But it is not for everyone.
What are the advantages of real estate investment?
Real estate is a great way to build wealth and generate income; Properties generally appreciate in value, but while they do, they generate rental income for the owner. And, historically, it has been incredibly reliable.
A property you bought in late 2000 could be expected to have doubled in value twenty years later, by the end of 2020, while rents increased 85% in the same period.
What are the downsides of real estate investing?
Real estate investing is not for everyone. Perhaps the biggest barrier is that it requires a lot of capital and immobilizes it, usually for a long time. And while long-term returns are good, that can’t always be said in the short to medium term. A home purchased in 2017, for example, only gained a little over 2.5% in value over the next three years, and for most of that period, it would have been worth less than the purchase price.
Income is also not always consistent as it is dependent on the property you occupy and the tenants paying the rent, neither of which is guaranteed.
And there can be significant costs, maintenance, routine or emergency, or legal costs, for example, can take a significant proportion of revenue.
How do you make money from real estate?
There is no real secret to making money from real estate, it is like any other investment; Basically, you need the growth in asset value plus the income you generate to add up to more than what it costs you to buy and hold. It is apparently simple but more difficult in practice.
Flip properties
Trading, or buying and selling real estate, is another way to make money from real estate. This is largely based on increases in the value of the individual property, often in relatively short periods of time, either from the general appreciation of real estate values or as a result of renovation or development work carried out on the property. Depending on the property you are tipping over, it might also be possible to earn passive income as long as it is owned by you.
It has some drawbacks. Like any real estate, it requires and brings together a large amount of capital. You are also more susceptible to short-term movements in the real estate market, which may not always work to your advantage.
However, many people find it to be a great way to make money in real estate. It is particularly suited to those looking for something practical, and many people essentially make project management their career. If you have a good knowledge of building, renovating, and decorating, or even the skills to do some of them yourself, it can be very lucrative.
Real estate investment by becoming an owner
Rental income is probably the most popular way to make money from real estate investing, both in terms of the cash spent and the number of people who get some income from the rental. While the real estate investor will expect the value of their assets to appreciate, they are generally interested in cash flow rather than equity value. While there will be some work involved in managing the real estate portfolio, the income will be largely passive.
Again, the downside is that it requires a large amount of capital. While it is possible to buy investment real estate with a mortgage, and many do, this comes with the risk that mortgage payments will be due whether or not you are generating rental income. This risk is most acutely felt by those with small portfolios where risk could be concentrated in just one or two rental properties.
Despite this, it is usually a profitable and enjoyable activity that offers a lot of security. While income is the main motivator for most people, they also have the security of a valuable asset or assets. And it is usually possible to determine how involved you are, from direct management of your real estate to using a management company, it can be as practical as you like.
Introduction to real estate investment
If you are considering getting started in real estate, it is important to get the right advice and take an honest look at your situation. Despite all the advantages, real estate is not for everyone and it does come with some risks and, if things go wrong, it can be expensive.
First, ask if you can afford it and ideally have the cash to pay for it. The return on real estate can be small compared to the required capital outlay. Make sure you can afford to have that capital tied up for a potentially long time.
If you are using a mortgage to finance your purchase, you still need to consider affordability; the bank can provide the capital but has yet to finance the repayments. Many people assume that the rental income a property generates will cover the mortgage, but will then fail if the property is unoccupied for an extended period. Ideally, you should be in a position where you can pay the mortgage even if you have no tenants, so there is no risk of default.
If you are confident that it is financially viable, you should thoroughly research any potential purchase. Think about the opportunities you might have to start small. Many people will start with just a small duplex that they rent, rather than buying an entire apartment block. This gives you the opportunity to learn the basics on a small scale without a costly learning curve.
Always research the area where you are thinking to buy property. Whether you are looking to change or rent the property you buy. Make sure you are aware of any planned developments that may affect real estate value. If the local government is planning a new highway, for example, it could mean that your real estate will accumulate value because it is now more accessible, or it will collapse.
And when you get closer to a decision, take a closer look at your situation. When you have a specific property in mind, you can start to make more informed assessments of the likely costs and income it will incur, if the rents in the area are high enough to cover the mortgage payments, for example, or The age of the building means that there is probably a need for fairly regular maintenance. These won’t be totally accurate, but they can help you make a more informed decision.
Finally, think about the risks. Make sure you have funds available to cover emergencies or, if you don’t have them, use the proceeds to generate them. And think about the vehicle you use to buy your property. Your attorney will be able to advise you which option is best for you, but using a legal entity to purchase real estate can help protect you against large losses.
A solid investment
Real estate investing is not for everyone. The capital required is too great a barrier for many people and others are put off by the management required. But it has always been a safe investment with a good return.
It’s a sign of the security offered by the fact that many people who have made their fortunes elsewhere, whether in the stock market or as entrepreneurs, often invest a significant portion of those fortunes in the property. Like any investment, you should always seek the professional advice of a specialist, but real estate is probably one of the best investments you can make.
Author Bio
Jonathan is the Founder of SPV Mortgages. He can help you find and secure the best-limited company mortgage options to push your property investment dreams forward. As a specialist mortgage broker with over 10 years of industry knowledge, he has helped experienced landlords and first-time investors across the country; saving you time and money in tracking down the best rates.