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Why is real estate a good investment?

by Helana Mulder on 17 Mar 2022

When someone mentions the word "investing," what comes to mind? While some may immediately say stocks and bonds, others know that real estate is an extremely popular and profitable form of investing. Especially in the past several years, investment properties have become more and more common as individuals choose to rent over buying a home.

Becoming financially stable and building up your wealth portfolio through real estate is a major step that many individuals have been taking for years. Investing in any sense of the term involves some learning and risk-taking, even real estate investing.

Investing: key points

In order to fully break down whether real estate is a good investment, there has to be an understanding of investing in and of itself. Investing is the act of pooling money, time, and resources in order to generate income or reward. Risk and reward are two foundational pillars of investing. Where low risk will often yield low rewards, high-risk investments can see high rewards.

One of the most important and basic recommendations for investing is to diversify your investments. As the saying goes, you should not put all of your eggs in one basket, but rather, spread them over a variety of investments like stocks, bonds, real estate, trusts, etc.

Regardless of what you choose to invest in, understanding these principles can help you grow your portfolio and start making money.

What is real estate investing?

The average price of a home in Ontario in 2010 was sitting at about $300,000. In 2021, just over 10 years later, that price rose to roughly $800,000. That is an increase of 166% in ten years. This is the basic foundation of real estate investing: buying low and selling high.

Buying your own home may seem like a daunting and expensive task, let alone buying investment properties. However, real estate investing is quite accessible and measurable, making it a popular form of investing for many individuals.

When you begin investing in real estate, there are a few key things you need to know about the different paths you can take. There are a few ways that you can begin investing in real estate ranging in cost, risk, and liquidity. It's important to understand your options and what is the best route for you and your financial goals.

What is a real estate investment trust?

One of the easiest and cheapest ways to get started in real estate investing is with a real estate investment trust (REIT). A REIT is similar to the structure or model of mutual funds that are traded on the stock market.

It’s a corporation that pools together the funds from various investors and uses that to buy property in the housing market. The corporation focuses on income-producing properties in order to see more rewards and cash flow for the investors. Each investor has the opportunity to make dividends without having to deal with mortgage payments and managing the property.

Like mutual funds, REITs are traded publically on the stock market and are far more liquid than other types of real estate. As well, they are a great way to generate some steady income and build your investment portfolio.

How much money do you need?

While you might think you need a large amount of cash to get started in real estate investing, there are actually some more accessible options that don't require breaking the bank. Buying real estate involves having enough cash available for a down payment. This amount can range depending on the type of property you are purchasing. A single-family home in a popular neighbourhood will likely have a higher down payment than a condo.

When you start investing, you want to find properties that not only make great investments but are also within your budget. This is where you can take advantage of REITs. As home prices continue to soar, down payments become more and more expensive. REITs can allow new real estate investors to break into the industry without needing a lot of money.

Other forms of real estate investing

While REITs are a great starting point for real estate investors, there are other methods of real estate investments that can help you build wealth and build equity.

One of the most common and effective forms of real estate investing is to own rental properties and become a landlord. This involves purchasing apartments, condos, single-family homes, or creating ensuite apartments in your home that are available to rent to tenants.

When you purchase an investment property that is to be rented out, you can use the monthly rent payments from tenants to cover the monthly mortgage payments and pocket some extra cash. This is a form of passive income that has become extremely popular for homeowners.

As mentioned before, with the average home price reaching over $800k, many people are turning to rental properties as their primary residence. Taking advantage of this by owning more properties available for rent can be an extremely strong and profitable investment. As well, you can also have your tenants pay the mortgage on the other properties and boost your credit score.

Pros and cons of investing in real estate

Many businesses and stocks rise and dip in popularity, but land has inherent demand. Even if the market cools and there is low demand, there is still a strong chance your property will sell and make you money in the long run.

Owning land and real estate can increase your net worth and can have several tax advantages. Investing in any sense of the term has some pros and cons that need to be weighed in order to make the right decisions and investments that suit your goals.

Pros

One of the biggest advantages of real estate investing is that it is very likely to appreciate over time. While there is a potential for another housing market crash like the one in 2008, it’s more likely that your real estate investment will grow in value over time. This is where the investment style of "buy low, sell high" really comes into play.

Buy low, sell high

For example, most investors also view their principal residence as an investment. If this is the case, you can buy a fixer-upper, take advantage of low-interest rates, and do some renovations or build an addition. These things can help increase the property value and enable you to "sell high" when the market is hot.

As the real estate market boomed this past summer, many investment property owners were likely selling some of their residential properties while the market was hot. Buyers were offering over asking prices for many properties because there was so much demand and little inventory. This is where real estate investing can make investors quite a bit of profit.

Real estate investments are a way for investors to take advantage of capital gains, diversify their investment portfolio, and increase their net worth. Real estate is also within the tangible asset class, adding another level of diversification. It also means that your investment can't disappear overnight as other forms can. Your control means that even if the market is dipping, you can hold onto your property and continue to make money off your tenants' monthly payments.

Steady cash and more control

Another benefit of investing in a rental property or retail space is a steady and consistent cash flow. If you have a property that you rent for $3,000/month and the monthly mortgage payment on the property is only $1500, you are banking $1,500 passively every month and roughly $18,000 in rental income year-round. Making the most of your rental income can help you continue to grow your portfolio, build wealth, and manage the monthly payment on your mortgage.

Real estate not only appreciates over time but is a way in which an investor can work towards building wealth and equity.

Finally, real estate investing puts you in the driver's seat. Having more control over the success of your investment can significantly help you profit off investments. With stocks, there are many factors out of your control and there isn't much you can do to influence the success of the businesses or organizations you invest in. On the other hand, investing in real estate means you can control your spending and profits through key decisions.

Cons

As we've seen, a high reward can often be accompanied by high risk, while low risk brings a lower reward. Every investment that yields some sort of profit involves some sort of risk or disadvantage, even when you invest in real estate.

Becoming a landlord

When you purchase an investment property, you are taking on some risks and obligations that can bring unexpected costs and frustrations. Being a landlord can sometimes mean dealing with disrespectful tenants, paying to repair any property damage, and managing the property as a whole.

You will also have to spend time finding tenants for your rental property, showing the property, and keeping up with tenant applications. This is an opportunity cost that you will have to consider when you invest in real estate. While you can hire a property manager, this also involves money coming out of your pocket.

Larger upfront costs and liquidity

As real estate prices continue to rise, owning investment properties require more and more money for upfront costs. With down payments, mortgage insurance, legal fees, property taxes, and other costs, buying land can be extremely expensive. This reality can make it entering this market for investment purposes difficult. Especially with the risk that one can lose money when investing, owning investment real estate is not possible for many investors.

One other drawback of investing in the real estate market is that it is a long-term investment. It's not very liquid, meaning you can't turn it into cash right away if an emergency comes up. Most of the time, investors aren't going to buy real estate and then sell it within a month just to make some quick cash. There's a bit of a waiting game that comes with this type of investing. This is where market research and understanding audience insights can help you take advantage of the market and make the most of your investment property.

The final consensus

Making the most of your real estate investments requires a good amount of understanding and patience. The housing market can be both predictable and unpredictable at times, which is why conducting market research is so important.

Do your research

Read about the market in the area that you want to buy property in. Consider what kind of renter or buyer you are targeting when you eventually put your house on the market. Understand the associated legal fees, tax benefits, and property taxes that come with investing in real estate.

Right now the demand for houses is high, meaning it may be smart to take advantage of this hot market and sell one of your properties. With the market expected to cool due to rising interest rates, it's best to consider your options in order to make the best decision.

Investing in real estate presents advantages and disadvantages that one has to consider before jumping into the game. While it can be extremely profitable, it also requires quite a bit of available cash to get started. As well, the reward also comes with low liquidity, patience, and more work needed than simply investing in the stock market.

It is also recommended that you work with professional real estate agents, mortgage lenders, property managers, and financial planners when investing in the housing market. These professionals can assist you in making decisions within your budget that suit your specific financial goals.

Investing in the housing market, when done right and done wisely, can yield great results and offer the pride that comes with owning property. Regardless of whether you invest in real estate or not, diversifying and managing your various investments is integral to your success. 



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