Benefits of investing in real estate
Real estate is some of the best types of investments a person can make. It’s no wonder that many investors choose to diversify their investment portfolio with making real estate investments! There are many benefits to investing in real estate, the least of which being creating a passive income stream.
But before we dive further into the many benefits of investing in real estate, let’s discuss all about what real estate is and what it means to invest in real estate.
What Is Real Estate
A lot of us may have an idea of what “real estate” means — and you may be right as to that answer. The official definition of “real estate”, according to the Oxford Dictionary, is that it relates to any land or building such as a house or an apartment block.
It’s considered as a form of “real property” which is generally defined as the piece of lang and all its fixed contents that’s owned by a person or entity. To put things into perspective, “personal property” is property that isn’t attached to land and it can refer to things such as boats, equipment, furniture, jewelry and vehicles.
What Is Real Estate Investing?
When someone “invests” into something, they are dedicating their personal assets into it (usually in the form of monetary capital) with the expectation that what they’re investing into will increase in value over time, in the hopes of gaining a profit. The same thing applies to real estate investing.
In the grand scheme of things, real estate investing refers to the dedication of capital into real estate with the goal of earning profits. There are a few ways to invest in real estate:
- Owning your own home
- Investing in rental properties
- House flipping
- Taking part in real estate crowdfunding
- Investing in real estate investment trusts (or REITs)
Benefits of Investing in Real Estate
Examining the upsides and downfalls of investing is extremely important before you make any type of investment decision, especially when it comes to real estate. Finding the finest places to invest in real estate could significantly increase your income if you are prepared to take on some risk and do some research — much like with any other type of investing. With that said, you can be rest assured that once you’ve decided to start investing in real estate, you’ll be able to enjoy some great benefits.
Some of the benefits of investing in real estate include:
1. Security and flexibility
With no bias intended, real estate has been proven time and time again to be one of the most secure forms of investment a person can make. It’s a long-term investment. Holding real estate over a period of years in the hopes of capital appreciation is typical of this type of investment strategy. While waiting for your property’s value to increase, you can make monthly income by renting it out — because the worst thing you can do with real estate is to leave it vacant.
The long-term financial stability provided by real estate investments is undeniable. Investing in something that generates a continuous stream of income has long-term monetary benefits as well. For investors, the steadily rising value of their rental property can be a source of security. Considering that both land and structures are appreciating assets, this indicates that your property’s worth will certainly rise over time. However, there is no assurance the value will keep going up forever. That’s why it’s crucial to check out the neighbourhood extensively before signing a contract on a house there.
2. High return on investment
If the value of the property you own rises, you’ll be able to sell it for a substantial gain. This is why investing in real estate tends to guarantee much higher returns on investment compared to most other forms of investment (ROI). Although, keep in mind that price appreciation isn’t always assured and although high ROIs are more likely than not, it does take a bit more time to enjoy those “returns” compared to other investment types. You need to choose the correct property to invest in if you truly want to reap the rewards, which definitely requires lots of research.
Before committing to the purchase of a property, it is absolutely vital to run the numbers. You can figure out whether or not the property is a wise investment and how much of a financial burden it will be with some careful math. While you can’t know everything there is to know about a specific property, but you can find out enough to make some educated guesses about revenue, costs, and return on investment. This is one of the best ways to reduce real estate investment risk.
3. You keep your money working
Thanks to the very nature of real estate investing, one of the biggest benefits is that you can keep your money working for you. Having your money “work for you” is an often-used term in any type of investment which basically means that despite you losing money in order to make an investment, that money will continuously grow, so to speak. Good investors always make their money work for them — but not all investments will offer this benefit. Hence, you need to remember to run deep research into any property that you’re looking to invest into before making that final investment decision.
After years of experience, we know that every pound we put into real estate is working hard on your behalf. You’ll feel like you have a legion of real estate investing henchmen working for you, each of whom will bring back more and more profit as time goes on. How does real estate make your money work for you? Well, there are four main ways:
- Income flow
What Types of Real Estate Are There?
Essentially, there are five types of real estate that exist although you’ll only be able to invest in four of these. For the purposes of education, we’ll go through each and every one of them in some detail so you can have a better understanding of them, and, ultimately, decide which kind of real estate is the best for you to invest in. Those types of real estate are:
Single-family homes, townhomes, duplexes, condominiums, and apartment buildings are all examples of residential properties. “Residential” real estate basically refers to any property that is or will be used for residential purposes. The type of residential real estate that you’ll find on the market may be brand new or pre-existing. In the UK, residential real estate is the most common type of real estate investment that people make — and with good reason! According to research published in the World Property Journal, the residential real estate industry was worth $33.6 trillion in 2021.
Residential real estate is a popular investment choice for several reasons, including:
- The low barrier to entry for obtaining financing makes residential real estate investments more attractive than commercial real estate investments;
- It is possible to acquire a building with a down payment of between 3% and 10% of the total price. Because of this, it is a realistic option for investors.
One can invest in residential real estate in a variety of ways:
- Short term: Usually done by “house flipping” — buying a lower-cost property and renovating it before selling it for a higher price right after renovations are completed.
- Long term: This includes buying the house to generate an income stream by renting it out.
Another type of real estate is commercial, which relates to any type of property that will be used exclusively for business. This includes (but isn’t limited to!) apartment buildings, hospitals, hotels, offices, petrol stations, parking facilities, restaurants, shopping malls, stores, supermarkets and theaters. While commercial real estate may not be as popular as residential, there are still people and businesses that invest in them because of it’s long-term viability and higher rent rates.
The down payment on a commercial property is often around 20% of the total price, and ongoing maintenance costs also tend to be much greater than residential real estate. One cannot generalise about the leasing and management of commercial properties because every single one is unique. This is especially because pricing for this property type is also heavily tied to the amount of money it brings in. However, those who are still keen on investing in commercial real estate could look into investing in REITs or joining a crowdfunding campaign as those options tend to have lower down payments.
Industrial real estate is a branch of commercial real estate, except that it refers to any property that’s used to produce, manufacture, distribute or store products, or for research and development purposes. To ensure that the construction and operation of industrial properties does not adversely affect nearby commercial or residential areas, zoning maps designate particular regions in each country as “industrial zones”. These zoning laws are extremely detailed, outlining precisely where various types of industrial activity are permitted or forbidden. That makes it harder to justify investing in factories and warehouses because of its limitations.
Since this definition encompasses such a broad range of properties, it’s crucial that you understand the specifics of each form of industrial property before committing to an investment in the sector. In essence, there are three types of industrial real estate, typically referred to as Class A, Class B and Class C.
- Class A: Properties that are the newest and highest-quality industrial buildings available. Modern manufacturing facilities are constructed from durable materials and offer convenient features like high ceilings and state-of-the-art mechanical and utility systems.
- Class B: Buildings that may be an older structure or a brand-new construction that lacks modern conveniences. Class B buildings normally have lesser rental revenue than Class A buildings, but they are often well-maintained. Some investors may regard Class B properties as “value-add prospects” that can be transformed into A or B+ class buildings with the right investments.
- Class C: Properties that are often 20 years or older, have neglected upkeep, and are in less-desirable areas. Their rental rates are modest, limiting passive investment opportunities. If done effectively, major restorations and alterations can turn Class C industrial sites into higher-value assets.
As you may have guessed, “land” refers to exactly what it states — empty land. In real estate, land refers to land that doesn’t have any structures upon it. It’s completely undeveloped property but it’s good for farms, ranches, homes, and businesses. Land owners have much more flexibility when it comes to their property, and are able to develop it into whatever they wish, subject to local regulations.
Purchasing vacant land is a popular investment tactic because it is one of the most affordable property options. These land parcels are available for a reasonable price and require little upkeep. It is frequently traded for the privilege of exploiting some form of natural resource or constructing some form of advanced technology in the future. However, a substantial quantity of money and an in-depth understanding of real estate factors like zoning laws, flood zones, etc. are needed to continuously invest in undeveloped land.
5. Special purpose
The final type of real estate is called “special purpose” and it is the only type of real estate that regular people can’t directly invest in. It refers to properties that are intended for public use, such as government buildings, houses of worship, libraries, parks and schools. These buildings are usually built and maintained by governments utilising taxes and while they are usually free for the general public to use, they do not generate any profits.
The Challenges Of Investing In Real Estate
As with most things in life, there are great benefits, but there are also challenges. Real estate investing is no different. Before you get started with investing in real estate, be sure to be aware of all facets of real estate investing, including its barriers to entry, such as:
The term “liquidity” refers to an asset’s capacity to be promptly bought and sold without a significant drop in value. A “liquid” investment is one that can be bought or sold quickly and easily. Shares in a publicly-traded corporation, money market funds, and foreign currency are all examples of liquid investments. Unlike most other types of investment, real estate is illiquid and therefore, turning your real estate investments into cash won’t be as easy.
2. Starting Capital
Finding the initial investment needed to make your first property acquisition is a major hurdle, especially for new real estate investors. There’s no way around the fact that you need quite a bit of capital to begin with in order to make any significant progress in the real estate market. That’s why a lot of people wait until later in life to start making investments of this kind, as it gives them a buffer period to save money before being able to start investing in real estate.
Especially if you’re investing in residential real estate, this type of investment will take a significant amount of time out of your day — even to the point of it potentially being a full-time job!
A Harris Poll from 2020 found that, in the wake of the pandemic outbreak, nearly 40% of urbanites were considering uprooting their lives. Already, people’s preferences in residential locations are changing as companies were forced to shift towards the “work from home” model. Suburban locations, with their plentiful space and modern office layouts, are becoming increasingly attractive to expanding firms. As more individuals look for methods to escape crowded places, this trend may gain traction leading to the inability to accurately predict which locations would be good places to invest in real estate.
When it comes to investing in real estate, especially during inflationary periods, it’s only natural that you might have a few questions. Here are the most frequently asked questions on real estate investing:
What are the advantages of investing in real estate?
Aside from the benefits of investing in real estate that we’ve mentioned before, there are definitely other advantages that you can look forward to enjoying. Those advantages to real estate investing include, but are not limited to:
- Diversification of investment portfolio
- Protection against inflation
- Leveraging funds
- Building capital
- Tax advantages
Apartment complexes, retail centres, and single-family houses can all be excellent investment vehicles that can yield supplemental monthly income as well as substantial gains over time. The point is to put money into things that will grow in value. However, like any other type of investment, there are risks to investing in real estate and may not produce a positive return.
What is the disadvantage of real estate investment?
You should think about the downsides of real estate investment before making your initial investment, in addition to the issues we’ve already discussed. We cannot stress enough the importance of research before making a real estate investment — regardless of whether you’re just starting out or are a real estate investment veteran. To name only a few of the disadvantages of real estate investing:
- Impacted by rent control
- Income may vary
- Not suitable for quick gains