Investing in real estate can be a nerve-wracking and stressful prospect for inexperienced or first-time investors. If you are feeling intimidated by the market entry barriers and unending real estate jargon, try to remember the advantages of property investment. To help jog your memory, we’ve listed four key reasons to invest in real estate:
- As a physical asset, real estate investments are a valuable source of diversification in your investment portfolio.
- Property investments give you a way to hedge against inflation, ensuring that your money doesn’t lose its purchasing power over time.
- Holding an investment property entitles you to a wide array of tax deductions and depreciation benefits.
- Real estate investments can provide a valuable boost to your cash-flow during your retirement years.
Before you rush to start researching properties and financing options, it’s important to understand the fundamental features and risks associated with real estate investing.
What is a Real Estate Investment?
To invest in real estate, you, as the investor, will need to purchase one or more properties for income generation purposes. An investment property is not used as a primary residence and will almost always be converted to a part-time or full-time rental home. Depending on your long-term investment objectives, you can structure your investment portfolio for either high rental income or long-term capital appreciation.
How to Profit from Real Estate Investment?
There are three ways for property owners to generate profit from their investment. We’ve briefly described each method below:
1. Long-Term Capital Growth
In real estate investment, capital growth refers to the appreciation of a property’s value over time. Property value growth is driven by a number of factors, including local demand, renovation potential, and proximity to developmental projects. However, due to market volatility, property investors should not hedge their entire investment strategy on property appreciation.
2. Cash Flow
When your investment property is rented out, the rental payments from tenants will generate positive or negative cash flow. In ideal circumstances, the annual cost of maintaining and managing your investment property will not exceed the yearly income from rental payments.
3. Ancillary Real Estate Investment Income
Ancillary real estate investment refers to profits gained through the inclusion of non-rent income sources, such as vending machines, application fees, or coin-operated laundry facilities. If you choose to invest in an apartment building or multi-unit complex, we recommend that you utilize ancillary income generation.
Key Considerations for a Successful Property Investment
Residential vs. Commercial Real Estate
Investing in residential property is a popular choice amongst novice and experienced investors alike. If you’re looking for strong rental yields and long-term value appreciation, property location is key. Investor demand is highest in areas with close proximity to top-rated school districts, public transportation networks, and local employment hubs.
Before committing to a large-scale residential investment, novice investors should accrue some experience by investing in an affordable and well maintained duplex or single unit. When you are more familiar with the investment process, you can begin thinking about investing in a more profitable residential real estate investment, such as condominiums, single-family homes, townhouses, or vacation homes.
If a building or plot of land is used for business activity, the property is classified as commercial real estate. Investors primarily target commercial property used by reputable brands and companies, focusing on office buildings, warehouses, restaurants, shopping malls, and high-rise apartment complexes. Despite higher upfront costs, commercial property investments typically offer better investment returns when compared to residential real estate. As the majority of commercial tenants elect for a multi-year lease, commercial property investors also benefit from increased tenant security and more stable cash flow.
It’s important to remember that a real estate investment is an ongoing commitment that will require active management. After investing in a property, you will be responsible for the following tasks:
- Searching for reliable tenants and vetting renter applications.
- Responding to questions from tenants and coordinating repair requests.
- Performing basic maintenance to maintain the interior and exterior condition of the building or home.
- Paying quarterly property taxes and amenities fees.
If you are willing to accept a cut in investment returns, you can hire a property manager to handle the bulk of your property management responsibilities.
Risks of Investing in Real Estate
As with any kind of investment, holding real estate exposes you to a degree of financial risk — the smart investor understands this fact and works to manage and minimize their risk profile. We’ve listed three different risk factors that every property investor should understand and account for:
- Your net profit margins may not withstand significant variations in purchase or management expenses. Unexpected outlays can be caused by a natural disaster, changes in tax benefits, or rising interest rates.
- If you are overleveraged, the high interest rates on low-down financing can leave you upside down on your investment property loans.
- Investors stand to lose significant sums of money if they are forced to sell an investment property during a period of regional or nationwide market instability. Investors can minimize the impact of property downturn by only purchasing homes in areas with multiple underlying growth drivers.
Still Confused? Take the time to Consult an Experienced Agent!
If you’re still unsure about how to get started in real estate investing, connecting with an experienced, local real estate agent is a great first step. By partnering with an agent in the Clever Partner Network, novice investors will secure full-service support and guidance throughout the entire investing process, from identifying suitable investment properties to up-scaling the size of your portfolio. By purchasing real estate through Clever, buyers can also arrange on-demand property showings, giving you a head start against competing investors.