You are guaranteed to lose money if you keep your funds in a savings account. The interest rate for savings accounts currently sits at 0.06% APY. Even modest inflation surpasses this rate. Combine a low return with the highest inflation in over 40 years, and it’s no wonder people want a solution.
Investing helps you keep up with inflation. You can earn returns that outpace inflation, but you can also lose money. Investors can select from many assets, further complicating the path to wealth. Many investors consider real estate for its tangibility, cash flow, and tax benefits. We’ll share some reasons to consider real estate investing and a few ways to invest in real estate.
What Are Real Estate Investments
Real estate investments are properties you buy to make a profit. Investors hope their properties will rise in value, and they can eventually sell properties for more than what they paid. Homebuyers will look through many properties to find the perfect one for their families. Investors solely focus on the numbers and profitability.
How Do They Work
Real estate investors primarily make money from rent and property sales. Rental property investors look for properties in locations where rent prices exceed the mortgage and other monthly costs. These investors want tenants in their units. After buying a few single-family homes, these investors often gravitate towards multifamily investing. Multifamily real estate properties have several units in the same building.
Investors hope to sell properties at a higher price than their cost basis. Cost basis is how much you paid to buy the property. While some people turn properties into rentals, others flip homes or follow a buy-and-hold approach. These investors only make money from the sale of the property.
Are Real Estate Investments A Good Idea?
Real estate investments give you ownership of a tangible asset that is always in demand. Everyone needs a place to live, and there’s limited land available. Indicators such as population growth, previous home sale prices, and historic rent rates can help you invest in better properties.
Real estate requires more work than stock investing. Fixing up homes and managing tenants can turn into full-time work. You can delegate these tasks to save time, but even then, you have to stay on top of your hires. Real estate investing can turn into a business. This line of work is optimal for people who can handle the extra work in exchange for cash flow, tax benefits, appreciation, and other advantages.
Reasons To Invest In Real Estate
Real estate investing offers many benefits you may consider when thinking if real estate is a good investment. We’ve outlined some of them below.
1. Real Estate Investing Can Help Against Inflation
The money in your bank account is guaranteed to lose value from inflation. Real estate investing can help you beat inflation. Property values and rents often rise faster than inflation. Rental property investors can hike rents each year to outpace inflation. Rental property owners even raised rates to outpace the highest inflation growth in over 40 years.
A Realtor analysis of December 2021 data revealed that rents rose 10.1% in 2021. In addition, the same research predicts a 7.9% year-over-year growth in 2022 rent prices. Both of these numbers beat current inflation numbers.
2. Property Appreciates In Value
Properties can appreciate as local markets gain demand and inflation increases prices. Appreciation increases your selling price in the future, and you can access a higher home equity line of credit.
3. You Can Add Value to Your Investment
Investors can add extra rooms and amenities to a property. They can also take less drastic measures such as renovating a single room or changing the cosmetics. Unlike stocks where you hope executives make the right decisions, you can apply sweat equity to your home. You have more control over opportunities to increase your property’s valuation.
4. Real Estate Creates Predictable Passive Income
Renting properties to tenants creates predictable passive income. Some tenants stay in your unit for several years and continue paying the monthly rent. This income remains consistent until the lease expires. You will have to fill vacancies or hire a property manager for help. However, some vacancies get filled quickly, while other tenants will sign a new lease to stay on your property.
5. Real Estate is a Tangible Asset
Real estate’s tangibility ensures it always has intrinsic value. The demand for housing will never vanish, and seeing a physical asset makes some investors feel more comfortable. You can drive to your investment property and check on it.
6. Real Estate is Insurable
Any investment comes with risks. Stocks can lose half of their value, and your property can get damaged. But, unlike stocks, real estate is insurable. You can buy proper protection to remain financially covered during a disaster. You can insure your property from various damages and also get liability coverage. This insurance policy protects you if someone gets injured on your property. Insurance provides more safety in a world of uncertainties, and you can’t get that same protection with stocks and similar assets.
7. Leverage and Easy Access to Funds Through Financing
Investors never pay upfront for a property. A 20% down payment is enough to gain ownership of a property. This financing makes it easier to acquire new properties versus paying the full price. Some investors tap into home equity lines of credit on their other homes to finance new acquisitions.
You can maintain this leverage as long as you can keep up with fixed mortgage payments. Each year, it gets easier to keep up with those payments. While you can raise the rent each year, fixed-rate mortgage costs stay the same. The gap between rental income and your mortgage will expand each year.
8. The Investment Is Transferable
Real estate investors can build their portfolios and provide multigenerational wealth. You can transfer real estate properties to loved ones in the future so they continue to accumulate cash flow and appreciation.
9. You Don’t Need Specialized Knowledge
Don’t know how to fix toilets or add new flooring to your investment property? No problem. Real estate is a people business, and you can delegate various tasks. Investors often delegate handiwork, property management, and other responsibilities. Instead, they focus on finding deals and hiring people with specialized knowledge to maintain their properties.
Different Ways You Can Invest In Real Estate
Real estate provides investors with several choices. Not everyone wants to manage tenants or fix up properties. We’ll share several ways to invest in real estate.
1. Homeownership
Homeownership isn’t only about living the American Dream. Unlike rent, each mortgage payment increases your home equity. Homeowners can eventually sell at a profit and enhance their homes along the way.
You have to live somewhere. Saving up for a down payment lets you live in a home that provides equity each month. Homeowners can eventually become debt-free and escape the mortgage cycle. This scenario is impossible for renters. You can even rent out a room in your home on Airbnb. You can collect rental income from your primary residence.
2. Buy-and-hold Property
You can buy-and-hold investment properties like you would with stocks. Some people look beyond their local markets to find affordable properties. These investors hold properties for several years before selling them at a profit. You can increase the ROI on buy-and-hold properties by fixing them up or having tenants.
3. Long-term Rentals
Long-term rentals provide a consistent stream of income. Long-term rental investors look for tenants who want to live on the premises for several years. Even if you break even, the tenant pays off your mortgage, giving you access to more of your home’s equity.
Long-term rentals come with risks. You could get a tenant who damages the property or refuses to make payments. However, these nightmarish scenarios happen less often. An effective tenant screening process will increase the chances of having quality tenants who pay on time and keep your property in good condition.
4. Short-term Rentals
Short-term rentals can produce more cash flow than long-term rentals. These rentals often charge higher prices since tenants won’t stay as long. If necessary, you can take a break from being a landlord after the current tenant leaves. It’s harder to make that pivot with long-term rentals.
Short-term rentals rely more on seasonality, and you’ll have to fix up the property between tenants. If you fill up a short-term rental throughout the year, you’ll make more money this way than with long-term rentals. The challenge is keeping those units occupied throughout the year.
5. Fix-and-Flip
The concept behind fix-and-flip investing is simple: improve the worst property in the best neighborhood. After those improvements, you can re-list the property at a higher value. Unfortunately, fix-and-flip can put you deep in the red if you don’t do your research.
Investors must look beyond the neighborhood and consider their margin of safety. If you buy a fixer-upper for $400,000 and similar properties in the area sell for $700,000, your margin of safety of $300,000. You wouldn’t want to spend all $300,000 on repairs since you would only break even.
Spending $200,000 on repairs gives you a $100,000 profit after making the sale. An inspector can shed light on what needs to get fixed and how much it may cost.
6. Real Estate Investment Trusts (REITs) And Online Marketplaces
Not everyone wants to manage real estate and hold onto properties. REITs and online marketplaces help you reap the benefits without owning property. You can invest a small amount of money and receive cash flow from REITs and online marketplaces. While the barrier to entry is lower and it’s less work, you won’t get all of the benefits of real estate investing.
7. Multifamily Investment Syndication
Multifamily properties are among the best pieces of real estate. These properties house multiple tenants and provide consistent cash flow. These properties have higher barriers to entry, but a multifamily investment company can take down the roadblocks.
Multifamily investment companies combine other investors’ funds to acquire multifamily properties. You’ll receive dividends for the multifamily property your funds supported. Some multifamily properties cost millions of dollars and have complicated down payment rules. Why deal with those hassles when another company can take care of it for you.
