First-time investors have a lot of options ahead of them. The potential gains are certainly exciting, but for many, the risk of loss is terrifying. Is it possible to find an option that offers low risk and promising returns? Could that option be real estate?
Let’s explore it.
Is real estate a safe investment?
If you want a quick answer: yes. Real estate is a generally safe option for many first-time investors.
Every investment comes with some type of risk, including real estate. Investors have options for reducing their risk by diversifying their portfolio with different types of investments. If you have the means to put your money into different real estate investments, you should be able to reduce your risk even further.
Before you start to invest, understand what makes real estate a safe investment in the first place.
Why Real Estate Is a Safe Investment
- Real estate is a tangible item. You can’t physically hold stocks. You can hold a stock certificate, but it does not compare to the reality and tangibility of real estate purchases. If you decide to invest in real estate by purchasing a rental property or another type of property, you have physical proof of your investment.
- Real estate will always be worth something. The tangibility of real estate adds to its worth. A house or a piece of land will never be zero dollars. But a stock can reach those depths in an instant.
- The real estate market is steady. The ups and downs of a volatile stock market can give you nausea. Just look at the last few days of 2018.
- Real estate investors don’t have to worry too much about inflation. As prices go up, rents go up too. Real estate can provide a hedge against inflation. If properties are managed well, the value of real estate will continue to appreciate at a rate that can fight off inflation and still offer gains for the owner.
- You can invest in real estate no matter how much money you have. Sure, putting $300,000 into an investment sounds like a big ask. Even if you take out a mortgage to cover the costs of the real estate, you will have to scrape up a down payment that is between 3-20% of the property. Luckily, new investors with little cash can still put their money into mutual funds or REITs that work like stocks.
- It’s easy to diversify your portfolio while still investing in real estate. Investors can diversify their real estate portfolio by investing in different locations, choosing properties with different level of risk, or buying into different types of funds or property investments.
Why Real Estate Is Not A Safe Investment (And How to Reduce Your Risk)
Real estate is certainly one of the safest ways to earn passive income and invest your money, but it is not perfect. Before you invest, know where your highest risks come from.
Hidden Costs Will Eat Into Your Profit
So the price tag on a potential property is $250,000 and you believe it will sell for $500,000 in five years. You can count on getting a $250,000 return, right? Not so much.
Real estate investors have to consider all of the costs that come with buying and managing real estate. These costs include (but are certainly not limited to:)
- The cost of interest, private mortgage insurance, and other costs of taking out a loan
- Repairs, inspections, and general maintenance
- HOA fees and property taxes
- Costs of maintaining a rental property (hiring employees, costs of finding tenants, etc.)
If you don’t include these costs in your overall budget, you might feel that you have fallen short of your potential gain when it is time to sell your property.
How to reduce your risk: It’s simple. Account for all of these costs when you are getting ready to apply for a mortgage, purchase property, or charge rent. Work toward reducing costs (by waiting for a better mortgage, completing a full inspection of the property before you purchase, etc.) or increase rent prices to cover these costs.
You Won’t See Cash Flow From A Primary Residence (Or A House That You Will Never Sell)
One common way to invest in real estate is to buy property. Over time, the value of the property will likely appreciate, allowing you to sell the property at a higher rate than when you originally purchased the property.
But if you buy a piece of property that you never plan on selling, you won’t ever see that money coming in.
How to reduce your risk: In order to make money from your investment, you need to have a plan to sell the property or make the property available for rent. Primary residence properties will get you a more affordable loan, but will not help you make money. Create a plan for renting the property out or eventually selling the property to eventually earn money from your investment.
If You Don’t Have Enough Money To Start, You Could Be Digging Yourself a Hole
In order to buy an investment property, you will need to put down at least 3% of the down payment. Ideally, you should be putting down 20%, but that can be $20,000 for an $100,000 property.
Unfortunately, investors who can only pay 3% or 5% will have to pay down the line. Lenders will hike up interest rates or the costs of private mortgage insurance for investors with bad credit or little money to put down. Those extra costs will eat into the amount of money you could be making with your investment.
How to reduce your risk: If you don’t have a lot of cash on hand, you can still invest in real estate. You don’t have to physically own property to benefit from the real estate market. Consider investing in REITs, real estate funds, or EFTs that still allow you to buy into the real estate industry without taking out heaps of loans.
When you create a solid, long-term plan for your real estate investment, you can invest with high confidence that you will develop a nice profit with little risks. Learn more about how to invest in real estate with our guide for beginners.