Why real estate investing is the best long-term wealth strategy
“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” One of the wise words ever said by Franklin D. Roosevelt. (https://www.realtymogul.com/knowledge-center/article/20-famous-real-estate-investing-quotes)
If you are thinking about investing in real estate, and looking forward to securing a financial future for you and your family without having to worry about cash/income in the later years of life, there are various methods for investing in real estate.
From single-family homes to multi-family properties to corporate properties, whatever type of property you decide on, you can never really go wrong with investing with real estate. Acquiring property as a long-term investment is the best way to put your cash in an appreciating asset that will eventually provide passive income over time.
Usually, when trying to create wealth, the first thought goes to investing in the stock market which is why Investors mostly use it as a place to put their investments which are great in the long run but what people don’t realize is buying real estate is also considered an investment, one of the best. With the right conditions, real estate offers you choices that can lower the risk of loss, yield better profit, and provide more diversification compared to the stock market. When you think of making an investment for retirement, saving for your child’s college fund, or earning long term income, you should start thinking about getting involved in real estate as an opportunity to gather wealth, with low risks and more control over the outcome.
Real estate is a lucrative business that gives wealth in the long term, but it requires patience, time, and of course, money, but it offers predictable/steady cash flow; it appreciates; provides a higher return and it gives equity growth through debt reduction. There are options for beginners to get started with, but it’s important to note that in real estate, the bigger the investment, the bigger the returns. So if you do decide to go into real estate, be sure that you have no debts and are financially stable enough to handle what is to come before you begin to yield results.
Reasons to Invest in Real Estate:
When you hear people talk about real estate and how much returns they make from it, you might wonder how they went about it or how they did it. It’s my job, in this post, to enlighten you on what makes real estate investment the best long term wealth strategy. Other than being able to make cash from multiple streams of income, the following are some key reasons for you to consider when you want to begin investing in real estate;
It has cash flow and provides income
The best type of cash flow is the kind that you can have for life. Real estate investments let you earn a passive income; so long as you’re in it for the long term, a good real estate investment should provide you with 6% or greater cash flow and potential for future appreciation. When you start investing, don’t bet on appreciation only, make a purchase on properties that you know will generate more income than it costs to own. That way, you don’t have to worry about prices dropping or rising, just great cash flow.
Cash flow comes as a result of leveraging on a mortgage (this will be explained further down) and using the equity build up on property portfolio by purchasing further pieces of real estate that will continue to bring you more passive income. A good investment will help provide you with enough cash flow and passive income that will eventually lead you to the financial freedom you desire.
The most important thing to take from real estate investment is that it represents a long term provision of income. I believe that someday we want to save to have something to fall back on or to enjoy financially when we retire, even though some of you might be in it already, for those who are beginners the best option is in real estate.
As earlier said, good real estate investment should provide greater cash and potential for future appreciation. For instance, you started real estate investment by buying land in an upcoming upscale location that attracted mostly big families 2-3 years ago before the location became in demand. Now it has grown and attracted way more families than it did when you initially got it, the value has been added and now you can either sell or rent out making way more than you put in.
Anyone that’s purchasing their home, instead of renting, benefits from the capital appreciation in their property. Real estate is one of the best assets to acquire. As growth in the price of property increases, you benefit more from the passive income and eventually begin to create wealth.
Real estate investment is a type of long-term investment strategy you should not hold back on.
From purchasing a home, you can benefit from the price rise in the housing market that causes your property to appreciate. That being said, you can expect the price of your real estate to continue to climb over the long term. It provides a stable return of more than 5-percent per annum.
To be able to enjoy appreciation to the maximum, keep in mind that location is important! The outcome of your appreciation depends on the location of your investment. If there is any lesson to take from this, let it be this “the longer you invest, the more appreciated value you receive, and this will give you the long term wealth you desire.”
It provides equity buildup
For people who end up taking out a loan to buy property, the paybacks are usually the rent money from the tenants. Investing in real estate does not only secure cash flow cash, but you slowly pay down your loans with each payment to the bank by tenants.
Initially, these loans go towards the interest of the loan taken, meaning you won’t be making much until you’ve had the loan for a meaningful period because the larger portion goes towards the principal instead of the interest on each payment.
As time goes by and a good amount of payment comes off the loan balance, wealth is then created in addition to the monthly cash flow. Paying off your loan is another way real estate investing takes you towards financial freedom. This principal reduction builds up equity.
It can be improved
Although investing in real estate business can be filled with peaks and valleys, if you don’t know how to handle it, it can leave you defeated sometimes. It is easy to blame the downsides of your investments on the property market, maybe the realtor or unforeseen events that may occur. But that’s the beauty of being able to improve your investments. Most times, all you need is making improvements to make a difference or fit an ongoing market trend.
When a property is acquired, it can be improved or renovated consistently over the years to increase its market value, and this is one of the great advantages of real estate. As a tangible asset, changes can be made to improve the value of any property. You can make your real estate worth more by improving it.
Since you know this, when you finally decide to invest in real estate, know that you can always improve your property by making necessary changes or upgrades to get the best of your returns.
It prepares you for retirement
Real estate investment makes for a good retirement plan to secure a comfortable and wealthy lifestyle even after you stop cashing those end of monthly paychecks. To maximize your chances of this, it’s important to be knowledgeable on the ins and outs of all your investments, take note of the details!
“Real estate can be a great asset class and diversification tool,” said Jeffrey Feinstein, a vice president with Lenox Advisors in New York City. “It’s typically not directly correlated to the [other financial] markets and can provide income from rentals or refinancing. Hold period is around four to 10 years, so it can be looked at as a long-term, retirement-friendly strategy.”
When you make a real estate investment now, over time, there’s an increase in cash flow and passive income that helps prepare you for a more stable financial future. The long term effect of real estate investment helps secure cash flow down the road over the years. How great is that?!
According to Investopedia, tax deductibles are:
“State and local property taxes are generally eligible to be deducted from a property owner’s federal income taxes, creating the property tax deduction. Deductible real estate taxes include any state, local, or foreign taxes that are levied for the general public welfare. They do not include taxes charged for home renovations or for services like trash collection.”
Owning real estate investments means you pay property taxes. Depending on the location, these taxes can easily be managed or become a huge financial burden. But since real estate taxes may be deductible, you can save money.
Tax deductions are made for basic expenses made in owning real estate, from upkeep to maintenance and improvements and even mortgage interest and property taxes. Real estate investing allows for several tax deductions. All the above can be deducted from your gross rental income and helps reduce the amount of tax you will pay.
“Real estate depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property placed into service by the investor. Depreciation is essentially a non-cash deduction that reduces the investor’s taxable income,” simply explained by the HomeUnion (https://www.homeunion.com/why-real-estate-depreciation-is-a-rental-property-investors-best-friend)
Depreciation has nothing to do with the value of real estate dropping. It’s a tax term that describes your ability to write off part of the value of the asset itself every year, which reduces the tax burden on the money you make. It helps the value of your investment property to actually appreciate by allowing a larger cash flow while giving a lower income for tax purposes.
Inflation is one of the reasons why real estate creates wealth so powerfully over time. As the value of money decreases, the price of goods and services increases.
Using inflation to build wealth in real estate is in the majority of your big expenses, which stay fixed for the period you own the property. When there is a rise in rents and home values caused by inflation, you begin to see big results.
Investing your cash into real estate is more lucrative than you can imagine, if you can achieve the nominal rate of 5-percent growth on your property, you can beat inflation by more than double. The rise in housing prices allows you to keep the buying power of your money invested in real estate.
Note that there are costs to be incurred when maintaining real estate, so if you invest in low yielding property, the costs of property taxes and maintenance fees may take up your investment. So when choosing a property to invest in, choose from the hot property market, you can be sure that the returns will exceed the costs.
This is one of the best things about real estate because you are able to make loans and pay these loans through tenants’ payments and still get to keep all the benefits to yourself. This still gives you cash flow.
Despite putting down a small portion of the purchase price, you’re entitled to all of the income generated, equity builds up, appreciation of the property, and you even get to utilize all of the tax write-offs.
According to the IRS:
“Mortgage interest paid on a second residence is deductible as long as you don’t rent out the residence during the tax year, and the mortgage satisfies the same requirements for deductible interest as on a primary residence. If you do rent out the residence, you must use it for more than 14 days or more than 10% of the number of days you rent it out, whichever is longer, for the mortgage interest to be deductible.”
Click here to know more (https://www.irs.gov/faqs/itemized-deductions-standard-deduction/real-estate-taxes-mortgage-interest-points-other-property-expenses/real-estate-taxes-mortgage-interest-points-other-property-expenses-5)
When you invest in real estate for the long-term, you get to a point where you have to pay off a substantial amount of the mortgage on your home, and this gives you the money value of the property. You can then leverage the equity from this to purchase more investments and increase your wealth, strongly advising that you buy more assets and as leverage to buy more investment properties.
Real estate investments are easy to purchase and finance with the right information and understanding of how to go about it. Knowing the above importance helps investors to improve their properties, increase cash flow, and know how to use the tax advantages.
Pros and Cons of Real Estate Investing
We would like to make sure you’re well equipped and knowledgeable on all aspects of real estate investments.
- There is less risk than the stock market
- A good source of predictable cash flow
- Tax deductions
- Provides good long-term returns
- Requires a lot of cash
- Issues with tenants and property
- Appreciation is not guaranteed.
There is less risk than the stock market: The real estate property market is less risky than the stock market because it has more predictability and stability and doesn’t fluctuate as often as the stock market does. Stocks are usually subject to the market, inflation, and the economy when gaining results, but real estate has you covered in all these areas, especially if you’re in it for the long run.
A good source of predictable cash flow: If the property acquired is rented, you have a predictable cash flow from payments made by tenants as well as from equity built up from leverage and tax advantages.
Tax deductions: Real estate provides tax deductions for property owners because of the maintenance and upkeep of the property, property tax, and mortgage interest. This may be more advantageous on your side if you have a lot of properties.
Provides long-term returns: The great thing about real estate investment is that it appreciates over time—the longer your investment, the better the chances of great appreciation, which helps you generate more wealth.
Requires a lot of cash: Before you can invest in real estate, you need to have a certain amount of money. As much you want to keep that passive income coming, you have to have enough cash at hand (loaned or personal) to pay for necessities and maintenance before the income starts flowing; without this, it’s almost impossible to make investments.
Liquidity: Unlike stocks, you can’t quickly turn the property into cash. In the case of an emergency, it’s more difficult to create cash from real estate investments.
Issues with tenants and property: If you manage your property or hire a property manager, there are times when you can face unexpected problems from tenants who don’t pay on time, leakages, power outages, and more.
Appreciation is not guaranteed: Your investments may come with the promise of appreciation, but this is not guaranteed, especially if the location of your property does not appreciate over the years or as expected.
Sectors of Real Estate Investments
To have a better understanding of developing, acquiring, owning, or flipping in real estate, educate yourself on the particular sector, you would like to be invested in. The following are sectors you can invest in;
- Residential Sectors: These structures have properties such as houses, apartment buildings, townhouses, and vacation houses. Residential areas are where people live with their families and is a great sector to invest in because the longer their rent and lease agreement, the better for your investments. The good thing is most residential leases are on a twelve-month basis.
- Commercial Sectors: This sector consists mostly of business and office buildings. Constructing small buildings with offices and leasing them out to companies and small business owners is a good investment. The rent you get from this can lead to stability in cash flow, occasionally markets do fluctuate, and rental rates may increase substantially over a short period, and this is beneficial except in cases where the property is tied to older agreements.
- Industrial Sectors: This consists of everything from warehouses, storage units, factories, telecommunications, or other necessities, that real estate can generate sales from customers who use the facility. This investment can have significant fees and service revenue streams.
- Retail Sectors: Properties that have to do with shopping malls, stores, and other retail fronts. When investing in this sector, sometimes, you can also receive a percentage of sales generated by the tenant store alongside their rent as an incentive to keep the property in the best condition.
- Mixed-Used Sectors: These properties are more diverse and are a combination of urban development, it brings together residential, commercial, cultural, institutional, corner shops and local businesses into one space that provides connections among the occupants. Any of the above categories into a single project. This type of real estate investment is for you if you have significant assets because it is handy for controlling risk.
How to invest in real estate to build long-term wealth according to the business insider
Knowledge is key, they say, before you are fully invested in real estate investments, here’s a summary of how to go about investing.
- Get your finances in order: As explained earlier, real estate requires a lot of cash to start up. Before you decide to invest in it, it’s important to get your finances in order. Make sure you have cash at hand, for emergencies, for necessary maintenance and even cash for daily use. Once you have this in order, you can then begin to think about going further with investing.
- Try investing in REIT: Test the waters of Real Estate Investment Trust, which gives you exposure without time and cost commitment of actually buying your own property. It allows you to fund the purchase, development, and management of real estate properties with other investors. REITs are basically dividend-paying stocks whose core holdings comprise commercial real estate properties with long-term, cash-producing leases but they are essentially stocks, so the leverage associated with traditional rental real estate does not apply.
- Get to know more about the local housing market: Knowledge is power, If you plan on buying an investment property, make it a habit to know the local market. This is a good form of research and a great way to know what you are getting into before investing. Talk to real estate agents and locals; make an analysis of everything necessary including price history.
- Build a local team: Successful real estate investing thrives on a built team of real estate agents, contractors, attorneys, and accountants who can all help your business run smoothly, invest in it.
- Keep it simple: You may have so many ideas on how to generate income from your property, remember to keep it as simple as possible.
- Buy a single-family home and rent it out: You can start out by buying a single-family home and renting it out which will only generate income if overhead costs are low. But starting with that can also prepare you for what is to come.
- Try house hacking: Buy a building with a mortgage, live in one unit and rent out the rest. You’ll be able to reduce living expenses and generate enough income to cover the rest of your mortgage payment, taxes, and insurance. The passive income made from this can be used to work on maintaining the property.
- Buy a multi-family building and sell off the units later: Buy a building on some discount, it will give you cash flow in the short-term, and appreciation in the long-term for building wealth and be sure to keep improving the property to guarantee appreciation when you’re ready to sell.
- Buy a fixer-upper and flip it: Although it’s one of the most time-consuming and costly ways to invest in real estate, getting a fixer-upper, renovating it, and reselling it can be a hit or a miss, but it’s worth the risk when it’s a hit. Flipping has a shorter time period during which capital and effort are tied up in a property, depending on market conditions, you can gain significant returns but be careful though, flipping houses requires a deeper market knowledge paired with luck.
For more information on this, you can check out: (https://www.businessinsider.com/personal-finance/how-to-invest-in-real-estate-make-money%3famp)
Ways to Invest in Real Estate Without Buying Property
In February 2019, Forbes gave great advice on nine ways to invest in real estate without buying property. In this article, they explained that there are various ways to invest in housing without dealing with tenants or property issues that arise now and then. The following are a summary of the tips they gave:
- Invest in real estate ETFs: An ETF (Exchange-traded fund) is an investment fund traded on stock exchanges, it holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value.
However, deviations can occasionally occur, as defined by Wikipedia. ETFs are one of the most actively traded instruments out there; it holds in stock issues share a pool of stock and trades like a stock. They are similar to index funds and mutual funds and come with the same broad diversification and low costs overall. From the stocks you buy from this, you gain exposure to real estate without necessarily owning property.
- Invest in real estate mutual funds: Just like you can invest in real estate ETFs, they suggested that you can also invest in real estate mutual funds. Because it’s low costs and track record that helps you feel confident about future returns.
A real estate mutual fund is a type of investment that’s made up of securities, mostly stocks, of companies that purchase real estate with money collected from investors, to invest in this means that you can make your own share of income from these companies’ returns.
- Invest in REITs: For the same reason, you invest in the ETF’s and mutual bonds, investing in REITs pretty much also allows you to invest with real estate without having to buy any property physically.
From the article, they explained that; “REITs let you do exactly that while also diversifying your holdings based on the type of real estate class in which REITs. This gives you the exposure of a landlord without having to be one and can be a part of your real estate investment portfolio as a result.
- Invest in a real estate focused company: It explained how many companies that own and manage real estate without operating as a REIT, some of them that are real estate-focused can include hotels, resort operators, timeshare companies, and commercial real estate developers.
You may have to research deeply to find these companies and think thoroughly through them before you buy stock in these types of companies but at the same time, exposure to a specific type of real estate investment.
- Invest in home construction: Investing in construction rather than the property is another good idea. Investors usually predict that construction of new homes will continue to boom over the next few decades or more.
In response to that, investing in the construction site of a property could also be smart money move in the right direction. For every rehabilitation and movement in construction, you can create wealth.
- Hire a property manager: If you don’t want to buy physical properties, you can hire a property manager that’s skilled at doing what they do best. They do all the difficult areas of real estate investment from handling tenants to maintenance while giving you more exposure to the investment process.
You are able to enjoy landlord benefits without even having anything to physically do with it. In this case, getting involved with property types that you are certain will give you cash flow, in the long run, is strongly advised.
- Invest in real estate notes: “Real estate notes are a type of investment you can buy if you’re interested in investing in real estate but don’t necessarily want to deal with a brick-and-mortar building. When you’re investing in real estate notes through a bank, you’re typically buying debt at prices that are well below what a retail investor would pay.”
- Hard money loans: If you’re still not keen on the ideas above but have the cash to lend, they suggested giving a hard money loan which is a direct loan to a real estate investor. That way, you can also be an investor and not have to deal with a property and the difficulties that may come with it.
- Invest in real estate online; the last suggestion they have was to invest in real estate companies online that have cropped up to help investors get involved in real estate without getting their hands dirty. Suggesting websites like Fundrise and Realty Mogul which let you invest in commercial or residential real estate investments and receive cash flow distributions in return.
They explained: “The cash you invest may be used to purchase residential property, commercial real estate, apartment buildings, and more. Ultimately, you get the benefit of dividends and distributions and long-term appreciation of the properties you own.” Also, according to Investopedia, “Online platforms connect investors who are looking to finance projects with real estate developers. In some cases, you can diversify your investments for not much money.”
For more information on this, you can check out this link (https://www.forbes.com/sites/jrose/2019/02/22/real-estate-investing-without-buying-property/#6d18edc271f5)
Here are a few tips on how to go about investing in your first property:
There are different ways to buy your first real estate investment. If you are purchasing a property, you can use debt by taking a mortgage out against a property you cannot afford and use the leverage from the interests to pay back.
But there are dangers in using leverage to purchase real estate, if the market is falling, the interest expense and regular mortgage payments could drive you into bankruptcy if you don’t know how to maneuver your way around it properly.
But you can manage the risks and protect yourself if you hold real estate investments through special types of legal entities such as limited liability companies or limited partnerships, rather than owning the property in your name and also consult with a qualified attorney for their opinion as to which ownership method is best for you and your circumstances.
For more knowledge on this, you can check out this link (https://www.thebalance.com/real-estate-investing-101-357985)
Here are some mistakes to avoid when you start investing:
- Not having an overall plan about the how, why, when, where, and in what you are investing, will give you a difficult time in achieving consistent success and understanding what makes a good investment for you.
- Lack of proper research: To understand the know-how’s, you must know how everything works. Take time to research an investment property, including the market it’s in; make sure you’ve thought things through and that a particular investment fits your real estate investment plan.
- Doing everything on your own: Most times, you think you can cover all the bases on your own, stop that way of thinking. Considering the cost of time and money, what would be the quality of the end product if you decide to do it on your own, would it be worth it? It’s best to seek counsel from experts or people with better knowledge.
- Not having a sustainability fund: This is very important before you even think of investing you should have money that can sustain you and your investments before you even start receiving any returns.
- Assuming you will get rich quickly: Investments take time, shortcuts are rare, and short term investments with potentially higher returns come with higher associated risk. Not saying returns can’t be made but are not as consistent as when you invest for the long term.
There are other mistakes to look out for, here’s a link on them with solutions for the mistakes (https://www.strategicinvestmentrealtors.com/blog/andrew-schulhof/10-real-estate-investor-mistakes-–-how-avoid-them)
From the explanation and summary of the importance, necessities, and all other aspects involved in real estate investment, should you be investing in real estate as the best long term wealth strategy?
The answer is simple, yes. From what you have read, if your long term wealth goal is to put current money you have to work today and let it increase over the years for future use, real estate is the best option for you. This investment not only gives you cash flow and passive income, the longer your investment, the more your appreciation value, which in the end gives you more returns than the initial cost. You can leverage mortgage interests and tax deductions that can help you build up equity while keeping all returns from it!
Unlike most investments, you can always improve your property over time, which in turn can help appreciate value, real estate investments give you advantages even in times of inflation and depreciation.
The investment definitely comes with its highs and lows, nonetheless, when you invest properly with good knowledge of each investment, you are likely to have more advantages. We discussed how to invest in real estate in 9 steps, from having enough money at hand, research, buying property and selling over time, flipping of properties, etc., to yield the best returns and also talked about how to invest in real estate without having to buy any property.
Picking the right sector for you to invest in is as important as the process, being educated, and knowing the in and out of whatever you decide to put your money into. We hope this helps you in understanding and deciding on how real estate investment can be a journey to the best long term wealth strategy you’ve always wanted.
Investing in property is not about timing the market; it’s about knowing and actively being involved with your investments except you choose to invest through channels like ETF’s, REIT’s, hard money loans, online, where you don’t have to bother about the difficulties that come with investing.
Real estate investments for the long-term consistently perform as one of the best long-term investment strategies that would lead you to the path of wealth. Happy investing!
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