Should You become a Real Estate Investor (as opposed to other types of investing)
If there’s one common goal that unites investors across the continents – it’s generating profits to increase and maintain their quality of life. Few other investment types help achieve this goal at the same rate as becoming a real estate investor.
While traditional investing can provide you more liquidity and sometimes even meteoric growth at a much lower price, real-estate investing offers substantial advantages that traditional investing just can’t.
However, one must consider that with the higher upside there also comes a lower downside, too.
What are the main benefits of investing in real estate
One of the top benefits with real estate is that its value generally goes up over time. While traditional investments can be subject to market instability and unsystematic risks that are industry-specific, housing trends upward due to the constant increase of demand and decrease (rather – slower increase) of supply. Real-estate appreciation will generate the greatest interest on your investment, whether it be by rent increase or selling the property.
Among benefits, there are tax advantages for real estate owners, too. For instance, you can get tax deductions from the depreciation of your property over time. If there’s any cash investment needed to fix up an outstanding problem with your property, you can claim a tax deduction on the amount. Or, in the UK for example, you can void your tax deductions on expenses and claim an annual £1.000 property allowance.
If the property you own meets certain requirements, you may not have to pay capital gains taxes when you decide to sell. The requirements may differ from country to country, but they typically concern the term of ownership, the size of the property and use of the property, among others.
There’s one benefit that just shouldn’t be understated when concerning real estate. Buying any sort of fixed-location living space, be it a flat or a house, is a rite of passage in most cultures around the world. In order to start a family, people around the world strive to own their own housing as opposed to renting or living with their families. While technically this aspect of owning real estate doesn’t have a direct investment value, it plays a major role in why real estate can be considered a multifaceted investment.
From a more practical viewpoint – whether it’s your first home or you’re looking to invest purely for the purpose of generating profit, investing into real estate is almost certainly a good investment. As long as you investigate every option thoroughly. And please do believe – there are many underlying aspects to any given option you should look into before buying.
Some aspects you should take in consideration are:
- location and housing market;
- physical state;
- your needs.
The location and the corresponding housing market may play the biggest role into how your investment will turn out. While it’s general knowledge that the world’s population is growing almost at a geometrical rate, the majority of humankind still flocks towards already well-established locations.
Metropolitan areas that attract businesses and manufacturing on average are bound to increase in value much faster than, say, desolate locations hundreds if not thousands of kilometres from the nearest civilization. And particular locations within those metropolitan areas are sought out more than others, too. Everything from adjacent schools and hospitals to road infrastructure, parks and even reputation can feature in the construction of value for real estate.
Thorough research and due diligence can help you in finding good-to-great value in real estate, similarly to other, traditional means of investing. And, while there is a luck factor in real-estate same as with, say, stocks – real estate value tends to be:
- less volatile than equity value;
- generally trending upwards.
The physical state of the property is another aspect that can turn a smaller investment into great returns simply because of hidden or ‘inconvenient’ value. If you manage to find a house in visually bad shape, it will often be priced well below the market for the area it’s located in, especially if other houses surrounding it are well-kept. And that’s where a potential investor might see the biggest opportunity – as visual defects are usually easier to cope with and help generate the biggest profit margin if the intention is to flip the property or rent it out.
On the other hand, if your research helps you determine that the problem lies deeper than just some faded paint, minor leak in the roof or cracked windows – this can also help you in price negotiations. Or steer clear of this investment altogether.
Whether you’re looking for a fixer-upper in the city to rent out or a cosy little family cottage in the suburbs – your needs factor in the purchase as well. If you’re looking for a home, the care you put in the decision will be, in most cases, even greater than if this property is purely an investment. The size, state and location of the property combined with your needs and risk tolerance will play a major role in this decision, since it will very likely be the largest investment of your life.
With real estate, your research is bound to pay off. So put in your very best effort!
Investing in real estate has its downsides, too
Especially if you compare it to traditional types of investing.
For one, real estate will demand a more hands-on approach than stocks, bonds or even cryptocurrencies. While in theory it means that you yourself are the master of your investment’s fate, in actuality it can run up the cost of investment, especially in the short term. Remember – time is money, so every hour spent refurbishing, maintaining your property is an investment that you better make sure pays off down the road.
While it’s very important to gauge the market and do at least some initial research when purchasing stocks, bonds or cryptocurrencies, the amount of time spent will be on average much lower than with owning real estate. And maintenance costs are virtually non-existent.
Then, as you might’ve already guessed, the liquidity of real estate is very low. If such a need arises, you may not be able to sell off your flat or house in a week or even a month. Much less in an hour. When a stock reaches a certain price, you will sell at that moment to turn a profit. With a property this process will take a much longer time and while real estate appreciation and price trends go up, this is a significant downside if you need to access your funds as quickly as possible.
Diversification is another flaw for real estate, as it is much harder to own real estate in bulk than buy ETFs. While property appreciation typically goes upward, especially long-term – sometimes things may go awry and your property value can fluctuate, stay flat or even depreciate due to reasons you have no influence upon. Considering the significant amount of investment real estate requires, not having any diversification can really hurt your portfolio.
And, finally, the amount invested compared to traditional investments will be much greater. Whether you’ll take out a mortgage or pay in cash, this investment is a set amount. While you can put off buying equity for a period, you won’t be able to put off your mortgage payments. You’ll be obliged to pay out the full amount or risk losing all of your investment.
In conclusion
Investing in real estate does have its flaws, mainly – illiquidity, high overall maintenance costs and/or high time consumption. But, if you’re willing to stick it out and take advantage of all the benefits real estate can offer you, the return will also be very high. Especially, considering how demand outweighs supply.
If you have doubts about whether you want to commit such a large investment in the first place, or want to have additional diversification – you can look into real-estate investment trusts (REITs). They’re investment trusts that allow you to invest into diversified real-estate portfolios that pay dividends on your investment. This way, you can allocate a smaller portion of your portfolio towards real estate, while still enjoying significant returns that the real estate market offers.