Why Real Estate Is A Solid Long-Term Investment
Are you thinking about purchasing your first piece of real estate?
Investing in property is one of the best assets you can acquire. There’s a reason why every successful investor has real estate in their portfolio – it’s a tangible way to accumulate wealth in a fixed asset.
There are numerous methods for investing in real estate. Some investors choose to purchase commercial properties, while others may look at single-family homes. Whatever the strategy, you can’t go wrong with putting your money into real estate.
Most investors like to acquire property as a long-term investment. It’s a place to park cash in an appreciating asset that has the potential to provide passive income. If you’re a first-time investor into the real estate market, then we put together these top reasons as to why you are making a sound decision with your money.
Capital Appreciation in Your Home
Anyone that’s purchasing their home, instead of renting, benefits from the capital appreciation in their property. Real estate has featured as one of the best performing asset classes ever. The steady growth in the price of property all across the United States means that people benefit from the wealth effect created by an ever-increasing property market.
Presently, the United States is suffering from a shortage of housing in many states across the country. Investing in real estate is a prudent long-term investment strategy, no matter where you live. Studies show that real estate is one of the top-performing asset classes across all categories, outperforming other hard assets like precious metals in returns.
If you’re purchasing your home, then you’ll benefit from the rising housing market. You can expect the price of your real estate to continue to climb over the long term. Real estate may not be able to compare to risky assets like stocks in terms of growth. However, it’s still provided a stable return of more than 5-percent per annum for the last 30-years.
Your results may vary depending on the location of your home and the state in which you reside. However, if you choose to buy property in one of America’s major cities or States, such as New York, California, or Florida, you have the opportunity to take a piece of the hottest property markets in the US. As a result of your prudent investment strategy, you can expect a healthy annual return that’s far above the 5-percent range.
Real Estate Beats Inflation
The Federal Reserve is America’s central bank. The Fed has a mandate of meeting an inflation target of 2-percent. Historically, over the last 15-years, the Fed has struggled to stimulate inflation, and they consistently miss their objective of making 2-percent, with most prints coming in far under this target.
However, even 2-percent inflation is enough to eat away at your savings if you decide to park your money in a savings account. Most banks offer no interest on your savings, and the fees and costs involved with maintaining a bank account will slowly erode your money over time.
Investing your funds into real estate is far more lucrative. Even if you only manage to achieve the n nominal rate of 5-percent growth on your property, you are still beating inflation by more than double. This effect of rising housing prices allows you to preserve the buying power of your money by investing it into real estate.
However, it’s important to note that there are costs involved with maintaining real estate. Therefore, if you live in one of the lower-yielding property markets of the country, the costs of property taxes and maintenance fees may end up eating away at your investment. However, if you choose a hot property market for your property, you can expect growth that far exceeds these costs.
The Federal Reserve is expected to enter another period of loose monetary policy, that may involve another round of Quantitative Easing, (QE.) QE adds more money to the financial markets in an attempt to stimulate inflation. However, investors and financial institutions use QE to invest in the markets, and you can expect the price of your property to rise during this period of monetary policy.
Low-Interest Rates
As mentioned, the Federal Reserve is entering a period of loose monetary policy, where they slash rates back toward zero. If you have any financial assets attached to an interest-related environment, such as savings or CDs, they may feel the pinch as yields decline. However, this next expansion phase in economic policy will provide a boom to the real estate market.
Low-interest rates make it easier and more affordable to purchase real estate investments. Since lender base your monthly payments on the current interest rate policy set by the Fed, you can benefit from this loose monetary policy by purchasing more real estate and adding it to your portfolio.
Leverage Your Mortgage
If you intend on holding your real estate for the long-term, then you’ll eventually reach a point where you pay of a significant portion of the mortgage on your home. Paying down your mortgage gives you equity in your home. Banks and other lenders will allow you to borrow money against the equity in your home. So, for example; if you paid $200,000 for your home, and pay off $50,000 over 5-years on your mortgage, you now have $50,000 of equity in your property.
If the property market increase over this same 5-year period and your home is no worth $250,000, then you have $1000,000 of equity in your home. Banks will let you borrow money against this equity.
Real estate investors describe this increase in property prices and equity as leverage. You can leverage the equity in your home to purchase other investments and grow your wealth. For example, if you have an extra $100,000 of equity in your home, this could act as a down payment on another investment property that you can rent out to tenants.
You can use this equity in any way you like. However, you mustn’t use it to maintain your lifestyle. Drawing equity out of your home to purchase furniture or go on vacation is a poor use of the leverage that’s available.
Smart investors use the equity in their property portfolio to buy more assets and grow their wealth. Plenty of investors use equity as leverage to buy more investment properties. However, nothing is stopping you from using the capital to obtain a cash business, such as a car wash, to bring in passive income.
Earning Passive Income from Investment Property
Purchasing your home has plenty of financial benefits. However, many investors don’t consider the house you live in as an investment – it’s more like a liability. As mentioned, you owe property taxes and maintenance fees on your home. If you don’t pay your property tax, the government will foreclose on your property.
Since your home is not bringing you an income, it’s not a real investment.
Leveraging your mortgage as described above, and then using it to purchase a second piece of real estate, gives you an investment in your second piece of real estate.
You can rent out your second home to tenants, and receive a monthly income. Provided that the money you receive from your tenants is more than your mortgage, you have a positive cash flow in the investment. Once you have positive cash flow from the property, then you are making money for doing nothing.
This strategy is how real estate investors build their wealth. By leveraging the equity in their property portfolio, they continue to purchase further pieces of real estate that continue to bring them more passive income. Eventually, you’ll reach a stage where you have more passive income coming in that you get from your job. At this stage, you are now financially free. Being financially free means that y0ou no longer have to rely on your job to bring you income. Your investments provide you with enough income every month to cover your expenses.
Less Risky Than Stocks
We already discussed that the average rate of annual growth in the United States real estate market is over 5-percent per year. However, the average yearly return on the S&P500 stock market is over 11-percent.
While this may entice investors, it’s important to note that stocks are a far riskier asset than property. The stock market bubbles of 2000 and 2008, sparked massive financial crises that saw asset prices fall by more than 70-percent in both cases.
Investing in the stock market and exposing yourself to the threat of a crash is a challenge that some investors are willing to take. However, you don’t have to worry about half of your house disappearing if there is another crash. Real estate is a tangible, hard asset that survives any market conditions.
The Tax Benefits of Real Estate
The Federal government provides a property investor with various tax breaks for stimulating the economy. As a property owner, you can deduct interest from your mortgage, and cash flow from your investment properties from your taxes. The government will also let you deduct your costs and expenses related to maintaining your properties as well. Any depreciation and insurance costs also provide you with a tax break.
The Benefit of Hard Assets
Real estate has the tile of a “hard asset” in the investment world. It earns this moniker because it’s a tangible asset, meaning that you can touch it physically. Other examples of hard physical assets would be gold coins.
Hard assets will never disappear, and they have a far lower risk than other financial assets, such as stocks. However, even hard assets do come with some level of risk. Should the property burn to the ground, or a tornado wrecks the structure, you could face a severe loss, especially if you don’t have the right form of insurance.
Should you lease your property to tenants, and they turn the place into a dump, it could cost you. The remodeling costs to repair the damage may eat away at all of your rental profits for the year. However, in most cases, property owners mitigate this risk by employing property companies to manage their real estate portfolios. If anything goes wrong, then the property company notifies you immediately.
Changing Environmental Conditions
The cardinal rule in investing in property, is “location, location, location.” Be careful about where you decide to invest your money into the real estate market. Some areas offer a far better return than others. Purchase a home in a school district or an area of the city that’s fast becoming a trendy place to live. Using this strategy, you can expect a fantastic return yon your investment.
An astute real estate investor will look for opportunities to maximize the profits on their investments. Finding a home that needs some minor repairs may save you tens of thousands of dollars on the market value of the house. Putting in some elbow grease into a fixer-upper is an excellent way to increase your property value and your financial leverage with the property.
Wrapping Up – When is the Best Time to Buy Real Estate?
Purchasing property is not about timing the market; it’s about getting involved. Unless you want to take a short-term approach to real estate investing, such as flipping homes, then there is no time when it’s a bad idea to invest in real estate. However, it’s important to note that flipping homes are more of a business than it is an investment strategy.
Real estate investments for the long-term consistently perform as one of the best long-term investment strategies available. Real estate is readily accessible for anyone with a decent credit score. Your credit score makes a huge impact on the amount of interest the bank charges you on your mortgage. Therefore, before you go out and purchase your first home, make sure that your credit is in the best shape possible.
If you hold onto your home over the long-term and free up the equity in the property, you have the ideal opportunity to leverage it and grow your property portfolio. Long-term property investments are one of the greatest secrets of building wealth, get started on your first real estate deal as soon as possible.