Investing in Real Estate
Category Expert Insight
Investing in Real Estate - Is it for me?
The thought of investing in real estate can bring out various emotions in different people. Some people thrive on buying and selling residential and commercial property (with some making a living out of it), while others are filled with fear and apprehension at the very thought of even buying their first home, thinking that it may be financially out of their league. The reality is that investing in real estate is one of the best investments you can make... and it's never too late to start. If you already have some form of an investment portfolio (this may include the stock market, bonds, company shares and assets) real estate is a valuable addition to add diversification. Investment specialists advise against "putting all your eggs in one basket" which could expose you to the risk of potential loss. We highlight the top reasons for investing in real estate, why it is a sound move and cover some of the associated pros and cons.
Why is Investing in Real Estate a Good Move?
- Financial Security
Real estate is a long term, appreciating asset. There are dips and peaks in the property market but, generally over the long term, the asset will appreciate, assuming the structural integrity is maintained.
Many people invest in property to set them up for retirement - either to live off the rental income or to sell the property and live off the profits. Investing early in real estate can give you peace of mind as you go through life, knowing that you have a nest egg that is secure.
- Deposits and Down Payments can be Leveraged
Investment advisors will tell you that there are not many available investments where you can leverage your initial capital to enable you to invest in assets with a higher value. With real estate, you can start with an initial down payment / deposit for an asset that has a much higher value. For example, if you have P100,000 to invest this would only buy you P100,000 worth of stocks. On the other hand, if you use this as a deposit on property you could (with a good credit record, stable income, and bank financing) potentially buy a house worth P1,000,000. As time goes on, you pay off your loan which means that you ultimately own more of your asset, allowing you to explore further options.
- Natural and Created Appreciation
Real estate will naturally appreciate over time, averaging about 5% - 8% per annum, assuming that the asset is maintained in a good state. In addition to this, the appreciation of the property can be increased by upgrades, renovations, or repairs. However, not all renovations can increase a property's value and you could over capitalize the property. In some instances, simply adding a garage or swimming pool to a property could increase its value. It is best to speak to experts and your estate agent before embarking on upgrades in a bid to increase the value of the property.
- Tax Benefits
There are tax benefits to owning property that you can explore. Before going any further, it is important to note that you should always speak to a financial advisor or tax specialist when exploring these options.
Owning a property can be like owning a business and there are several expenses that you can write-off:
- Mortgage interest paid on a loan
- Maintenance expenses
- Real estate taxes, home insurance
These are great benefits to being a property owner.
- Potential for Monthly Earnings
If you own a property and rent it out for more than your loan repayment, you can earn additional monthly income. Obviously, if you do not owe any money to a financial institution, the whole of the rental income is at your disposal. There is always a risk that your tenants may default or cancel their rental contract early, but there are risks associated with every investment. Good, happy tenants rarely default.
- Use Generated Equity to Increase Portfolio
As your property's equity increases, you can use this equity to finance further property investments. For example, if you have P500,000 equity in a home, you could refinance the mortgage on that and use that money on the deposit for your next property investment. As time goes on and depending on the value and appreciation of your investment, you may even be able to pay cash for future property investments.
- Options for Investing in Real Estate
Other than the traditional "buy to rent" method there are alternative ways to invest in real estate.
- Buy an undervalued property, carry out renovations or refurbishments - this is called "fix and flip" method and the house is generally sold for a lot more than the initial investment and subsequent renovations.
- House-hacking is a term coined in the USA. This involves the process of buying a multi-residential property, living in one of the units and renting out the others. The rental income is then used to finance the mortgage repayments.
What is a good property to invest in?
This is a very common asked question, and something that nobody has the "million dollar" answer to. However, years of property investment trends has shown some common themes and pointers to look for when finding a good investment property.
- The first thing you can do is speak to an estate agent to ascertain what areas have grown in value or, at the minimum, maintained their value over recent years. They will know what areas are popular in the market and why.
- Find an area that is attractive to renters - look for facilities such as schools, shopping centres, good road access, low crime rates, and access to medical practitioners. These are factors that potential tenants do look for.
- Look for the price of property in areas and compare this to your budget. Budgets can sometimes determine where you can buy property and often out of town locations are more affordable, but sometimes not as desirable.
Know the possible downsides to real estate investment.
As with any big decision you make, it is best to be aware of the negative possibilities of taking a big step. Understanding the pros and cons of an investment will help you make more informed decisions.
- Nothing is Guaranteed
As with any investment made, there are no guarantees that you will make profits. Certain factors can have an influence on the potential that your investment has such as government policy, socio-economic factors, environmental factors, even the current pandemic. However, fortunately, if you are patient and can ride out any dips in market demand, the property market usually bounces back.
- Rental Income is not Guaranteed
If you have tenants in your property, you have no guarantee that they will not default or cut short their rental agreement. In this instance, the mortgage repayments would fall on you to cover, unless you are fortunate enough to get a new tenant immediately. You should possibly have enough reserves to cover the mortgage repayments for several months should this happen.
- Securing Financing is not Guaranteed
In order to get bank financing, you would need to have (amongst other things) a good credit rating and a stable income, and in some instances this may not even be enough. Raising enough money for a deposit can also hinder your investment plans. Financial institutions will have certain factors that they will look at before issuing any property loans and these are determined by their market research and analytics.
In conclusion, investing in real estate is a sound way to diversify your investment portfolio and there are many advantages in doing so. Ultimately, real estate investments are a long-term investment and not a quick way to make money, you need to have patience and a broad understanding of how these investments can work to your benefit.
Author: Leo De Angelis
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