Why is investing in real estate the best idea for individual investors?
If you’re an individual investor looking for a way to diversify your portfolio, you’ve come to the right place.
Real estate is one of the many different ways of investing, but it triumphs over the rest as it is one of the oldest forms of investment. When you think of investing in real estate, you might think of buying a house or an apartment. However, the field of real estate investment is much broader than that and is multi-faceted.
Why invest in property? We’re glad you asked. In this article, we’ll tell you all you need to know about why investing in real estate is important for any investor’s portfolio. But first, let’s dive into some of the basics.
Differences between saving and investing
If you’re a fresh-faced investor keen on making your first investment, you should definitely be aware of a number of things. A lot of non-investor folk like to believe that investing is similar to, or even equal to, saving. Because of this mindset, they don’t think that investing is really worth the time, effort or energy.
They couldn’t be any more wrong. In fact, the only thing that saving and investing have in common is that they both involve the use of money. Otherwise, they’re two completely different things! Let’s highlight the characteristics of saving versus that of investing so you can see the glaring differences between the two:
Characteristics of saving
We put money aside for future purchases and to put into a rainy day fund for those rare, unexpected expenses. When we save money, we know we’ll have access to it in times of need, and we know that its purchasing power is rather stable. It’s crucial to keep tabs on your savings with a specific end date and monetary worth in mind.
For an annual abroad holiday, you could set a goal of saving £2,000 in six months, which you could then spend at the end of the year. That way, you may plan ahead for your dream vacation and save the appropriate amount each month, all without incurring any fees. Using a savings account can be beneficial in this case, as banks would tend to provide a small interest rate so that your money accrues over time. However, interest on savings can never compete with the growth made possible by investing.
Characteristics of investing
On the other hand, we need to be cautious and strategic in our investment decisions. If you start investing at a young age, you will see greater returns. It is crucial to your financial success that you learn about the many investment vehicles available, their purposes, and how to effectively employ them. We put money away for the future in order to secure our financial stability, purchase a home and provide for our children’s future educational expenses, as well as for our own future retirement.
In order to raise the value of our money, we invest in stocks, real estate, and mutual funds, all of which have the potential to appreciate in value over time. The biggest difference between saving and investing is that if an investment fails, we usually lose the money and never see it again. Risk plays a much bigger role in investment compared to saving — but that’s the very reason why the rewards of investing are so great.
Why it is important to start investing as soon as possible
Regardless of whether you’re 21 years old or 41, the best time to start investing is now. Like most things in life, investing is more rewarding when you get a head start. There is a direct correlation between how early you start saving for retirement and how much of a return you may expect. Investing in your future now, especially if you’re at a young age, will pay out in spades later.
Investing at a young age helps establish a lifetime pattern of self-reliance and self-control with money. Learning the distinction between investing and saving early on is crucial. No one is ever too young to start investing, so don’t let your age stop you. A small outlay of cash now will yield larger returns down the road. If you’re still unsure about the merits of beginning your investment journey at a young age, consider the following five arguments in favour of doing so right now:
1. Savings is not enough
Although saving money is crucial, it’s merely the beginning of a person’s path to financial security. The fact that money sitting in a bank account does not grow in value over time is a major factor explaining why saving alone is not enough. Although our £100 today will still have the same numerical value in 10 years, we would be able to buy considerably less with it because of inflation.
Smart investors always begin by setting aside enough money in a savings account or money market account to cover unexpected expenses. However, after you have saved up enough money for three to six months of living expenses in an easily accessible account, investing in the financial markets can provide substantial benefits.
2. More time to take risks
High-risk investments often offer the greatest potential returns on investment, but they also carry the greatest potential for loss. Those who persevere until they achieve their goals are more likely to be rewarded abundantly than those who give up too soon and opt for the “easy route.” One of the benefits of investing at a younger age is that individuals have the opportunity to take higher risks because they have more time and financial resources to weather the storm in the event that their investments are unsuccessful.
When investing early, even at a loss, you have more time to recover from that setback. When compared to a younger investor, a later-starting investor has a shorter window of opportunity to recoup any losses, and as such, their investments tend to be on the safer side. Therefore, beginning to invest sooner rather than later provides your money more time to grow.
3. Utilise compounding effects
Compound interest, in its simplest form, is interest on interest. The rate at which your money is put to work increases exponentially as you keep putting back what you make. This means that the profits or dividends themselves begin to produce income. In other words, compounding occurs when your investment yields further return on those returns.
Consider the potential power of compounding by reinvesting dividends from dividend-paying stock investments, for instance. In the realm of investing and finance, the power of compounding is a widely known and widely acknowledged secret. Although there is widespread knowledge of compounding’s potential for rapid financial growth, few people really put it to good use.
4. Higher chance of retiring early
You can retire earlier if you start investing while you are young. It’s possible that by the time you’re in your late 40s or early 50s, you won’t need to keep working to provide for your basic requirements or pursue your other ambitions in life. If you don’t start saving until later in life, you might never be able to afford such a luxury.
Investments made at a young age improve the odds of achieving financial security earlier in life. This is thanks to the opportunity to enjoy longer periods of compounding interest, compared to if you started later on in life. Retirement today has more challenges than ever before, especially thanks to the ever-increasing living costs. Therefore it’s more important than ever to start making plans now to ensure a happy retirement.
Advantages of investing in real estate
Now we’ve highlighted why it’s so important to start investing as early in your life as possible, let’s start talking about one of the most valuable ways of doing so — investing in property.
One of the most crucial things an investor needs to do is to diversify their investment portfolio. What this means is that you shouldn’t be simply investing in one fund or stock or even only one kind of investment. Diversification of your portfolio carries the benefit of making it stronger and, thus, providing you with more opportunities for better returns over time.
With that said, real estate investing is a tried and tested method of investment that carries many benefits to those who choose to invest in it. Let’s quickly go over some of the biggest advantages of investing in real estate:
1. Great returns
Real estate that increases in value can be sold for a profit. For this reason, the returns on real estate investments tend to be higher than those on other types of investments. Neither price appreciation nor high returns on investment are guarantees; nonetheless, the time it takes to see a profit from either is far longer than it would be from most other investments. It takes a lot of research to find the ideal property to invest in.
However, it’s important to do the math before committing to a home purchase. You can figure out if the house is a good investment and how much it will cost with some simple calculations. You can gather sufficient data about a property to generate reliable predictions about its income, expenses, and return on investment (ROI).
2. Passive income
Putting your money to work for you indefinitely is a major perk of investing in real estate. To “have your money work for you” is to invest it such that it earns more money in the long run, even if you take a small loss in the short term. The savviest of investors understand that not every bet will pay out. This is why it is so important to do your homework on a potential investment property before putting down any money.
Our years of practice have taught us that every dollar we invest in real estate is always money well spent. You’ll feel as though you have an army of underlings working for you in the realm of real estate investing, all of whom are bringing back ever-increasing profits.
3. Long-term security
Real estate is a safe investment, without a doubt. It’s also, for the most part, a long-term investment. This investing strategy involves holding real estate for a long time to gain cash. Renting out real estate while you wait for its value to rise is a terrific method to make a monthly income.
Real estate investments provide financial security. Long-term investment in stable profitability pays well. Rental property’s rising value might reassure investors. Both land and structures appreciate; therefore, your home’s worth will rise. Prices won’t keep climbing forever. As a result, prospective homebuyers should do considerable research on the area around the neighbourhood before committing to a purchase.
Although most individuals worry about inflation, property investors don’t have to. One of the most beneficial advantages of real estate investing in the present market is that properties are rarely affected by the impacts of inflation. Property values tend to increase with inflation rather than decrease alongside costs of living.
5. Inflation protection
The potential of real estate to hedge against inflation results from the positive correlation between GDP growth and real estate demand. In thriving economies, rents rise in step with the rising demand for living space. Consequently, this leads to greater stock market valuations. Since real estate typically passes on some of the inflationary pressure to tenants and incorporates some of the inflationary pressure in the form of capital appreciation, it helps to preserve the purchasing power of capital.
Your expenses and profits as a real estate investor will grow in tandem with the value and income of the properties you own. By changing rents annually in line with inflation, landlords can keep their income stable or even grow. Knowing the laws and regulations, giving the required amount of notice, and writing a professional yet straightforward letter are all essential when it comes time to increase the rent you charge your tenants.
How to invest in the real estate market
After looking through the advantages of investing in real estate, you must be wondering: “How do I start?”
Contrary to popular belief, there are many more ways to invest in real estate than just property. Let’s quickly go through the three main ways to invest in real estate:
1. Buy property
This is the classic way to invest in real estate. Buying property can include buying a house or an apartment or even purchasing commercial property. When you buy a residential property, you can either live in it yourself and sell it at a profit at a later date or rent the property out to enjoy a nice passive income stream.
2. House flipping
House flipping is a popular method for those looking to generate a rapid profit from real estate investing and is the only way of doing so — with some risks. A quick flip occurs when a residence is purchased at a discount, renovated, and then sold for a profit. The trick is, of course, to find the proper house. When you’re flipping a house, monthly rents aren’t on your radar. Instead, if you want to make a good profit while selling, you should buy a home for as little as feasible.
3. Invest in REITs
Investment trusts in real estate might be a good option for those who want to get in on the real estate market but aren’t quite ready to take on the responsibilities of property ownership and management (REIT). Real estate investment trusts (REITs) are available for trading on major stock markets. As a result of the huge volume at which they trade, many allow for instantaneous entry and exit. Real estate investment trusts (REITs) are required to distribute at least 90% of their profits to shareholders annually. Therefore, they often pay bigger dividends than many stocks.
What do you need to know to invest in property?
Basically, anyone can start investing in property if they want to. However, there are a few things you need to keep in mind first before deciding to make any sort of real estate investment:
- Ensure that you’re financially stable — zero debts!
- Make sure you have time to manage your investment/s
- Choose your investments wisely — do your research!
- Calculate the potential expenses before making a downpayment
What is needed to start investing in real estate?
Nothing, really! You don’t need any type of qualification to start investing in real estate. However, the only things you do need are:
- Ample funds
- A lot of patience
When starting your investment journey, it’s important to be aware of all the different types of investments out there. Start as early on in your life as possible, but remember to invest within your means. You’ll be able to reap the benefits in time. Just remember to keep patient, make smart, informed investments and have fun!