Real Estate investment has gained its popularity as the best long-term investment along with stock and mutual funds, gold and saving accounts. Real estate is considered an excellent investment because it’s risk-free and anyone can invest in real estate. One does not require any special skill or specialization in any field to invest in real estate. Even the first-timers can do it and real estate yields amazing returns in the long term.
One prefers investing in real estate also for regular rental income, which is generated for the investor with 100% certainty and keeps increasing over time along with the capital value of the property. But this investment comes along with a price of fixed expenses like property taxes, mortgage money, insurance, property maintenance, tenant hunt and dealing with problems related to owning a property.
The primary mode of income for landlords is rent and determining how much they can charge depends on the location of the property. A landlord can fix their rent depending on the market because if they charge too much, they will end up chasing their tenants away. The other way of making money by the landlord is through appreciation. If the value of the property appreciates, the property owner can sell the property at the appreciated value and the difference will be their profit.
Real estate is more attractive as compared to traditional sources of income. The reasons behind it are:
A risk-adjusted return is a calculation of profit or potential profit calculation from an investment. The investment needs to take into consideration the risk that is acceptable to achieve it, which is measured compared to virtual risk-free investment.
Real estate enhances the return and risk profile of an investor and offers them risk-adjusted returns. Real estate investment is low in irregularity as compared to bonds and equity, which makes it a more attractive source of return.
Protection and diversification
Real estate investment saves you from principal-agent conflict, which arises when one entity appoints another entity legally to act on their behalf, which further leads to conflict in interest. Real estate is done directly and hence provides you protection from such conflict that can arise in the case of other investment tools.
One of the biggest advantages of investing in real estate is that this investment tool has either no or very little correlation with other asset classes. This means that in the case of other investment tools, even when they are well-diversified, they are still under market risk, which cannot be curtailed by adding new stock. But with real estate, adding new real estate will only lower the risk of instability and will provide a high return per unit.
Protect inflation hedge
An inflation hedge is an investment that is made to protect you from the decreasing power of purchase of a currency because of inflation or loss in the value of currency globally. In such scenarios, they suggest assets that can maintain or increase their value over time for investment and real estate is one such investment tool.
All you need to do is find a good real estate agency. With the help of the agency to find Invermere homes for sale, start with your investment. This capability of real estate creates an important and positive relationship between GDP growth and demand for real estate.
Real estate is also considered a capital appreciation medium because when the economy of a country expands, the demand for real estate increases, which will lead to higher capital value. This scenario not only maintains the purchasing power of the countries’ capital but will also help the economy bypass the inflationary pressure.
The advantage of leverage
Leverage or borrowed capital is a type of funding source which helps the organization to expand its firm’s asset base and generate a return on risk capital. This tool is something that is not available for stock market investors but is available if you are investing in real estate.
In most typical mortgages, the maximum down payment is 20% and it starts with as minimum as 5%. This means that you control the property just by paying a fraction of the total value. Whereas, with other investment tools, pay the full value at the time of purchase unless you are buying on margin.
A second mortgage or home equity loan is a loan that allows the property owner to borrow against the equity on their property. This amount is the difference between the mortgage due balance and the property’s current market value. This gives the real estate owner the courage to invest in other property as they take a second mortgage on their property and put a payment on two, three other properties.
A drawback of real estate investment
Real estate is an investment tool that comes with a steady income and helps you build wealth, but real estate also holds a major drawback, and that is illiquidity. Illiquidity is a situation in which the assets such as stock, bond, real estate or any other asset cannot easily be converted into cash without a substantial loss in value.
A real estate transaction takes months to take place as compared to a stock or bond transaction, which can get completed in seconds. And during that period, an investor may face a decrease in cash flow.
People all over the world have become billionaires from real estate more easily as compared to any other industry. This is because of the demand which is increasing with the increase in population.
The advantage of this scenario is that the demand will grow because there is a limited supply of land and hence real estate will yield great returns long term. Real estate also comes with the advantage of fixed or regular rental income, which provides a sense of security in the mind of the landlords. Also, this income is 100% certain, unlike stocks and bonds which highly depend on market forces.
There is a ground rule with any investment including real estate and that is you need to keep your expectation of return realistic and need to conduct proper research and investigation before making any investment decisions.