7 Reasons Why You Should Do Real Estate Investing

In a nutshell, real estate investing means buying, owning, and managing real estate to make or generate income. And while to many, investing in real estate easily paints a picture of owning physical properties, there are many other options to choose from when it comes to this type of investment and just as many ways to make money out of it.

The good thing about real estate is that investing in it brings the potential for great returns and promises, a more stable cash flow when compared to other forms of investment.

Also, real estate often increases in value as time goes by, which makes sure you get your money’s worth even if economic problems happen! What this means is real estate can stand on its own and can bring money in over and over the longer you own property!

Here are the top seven reasons why you should invest in real estate.

1. Real estate is leverageable 

Perhaps the most important part of investing in real estate is its capacity to be used as leverage. Leveraging means using borrowed capital to further improve the investment’s potential return. In real estate, this happens when the amount of investor capital needed to buy a real-estate property is reduced through mortgaging.

For example, in mortgaging, paying out a percentage of your own money to serve as a down payment already gives you 100% ownership of the house. If you end up borrowing the remaining amount instead, the majority of the funds to own the property is taken by the lender, who also now shoulders the majority of the risk.

But the potential yield of the borrower is high when it comes to the appreciation of the property over the years. For instance, a £220,000 property bought this way increases in value by 5% per year. The owner of the property (in this case the borrower) will have their net worth grow to £231,000 in just 12 months.

If a property is instead bought outright with 20% of the amount, that money spent would only be £44,000 and with the same 5% appreciation rate, it would yield a £2,200 increase.

Leveraging then can be used to drastically increase one’s net worth, which in return, opens avenues for other potential businesses and investments over time.

2. Tax benefits

Investing in real estate brings in several tax benefits. For example, tax deductions can be obtained from the different expenses that come from investing and owning properties. These may include property tax and insurance, mortgage interest, repairs and maintenance, capital improvements, management fees, advertising expenses, and more.

Even when investing through entities, such as a limited liability company or a limited partnership, there will still be potential tax deductions. Some of these deductibles may come in the form of advertising or marketing expenses, legal fees for attorneys, professional fees for accountants or bookkeepers, from the purchase of equipment used to run the operation, office space rent, travel and food expenses, and so on.

These expenses can be deducted either overtime or at face value. Keeping track of your investment’s expenses throughout the year will give you the ability to track and claim these deductions when filing your taxes.

3. Low-interest rates

Investing in real estate allows investors to enjoy low-interest rates which in turn can yield great gains in profits. These days, lending standards have become more welcoming to people and banks are now more than willing to lend you money to win you over as a client.

Typically, the best ways to take advantage of low-interest rates can be applied when investing in residential real estate properties like condominium units, single-family homes, and the like. Commercial lending has different rules and rates, so this is something to keep in mind.

Fixed-rate and adjustable-rate mortgages are two primary ways to take advantage of low-interest rates. Fixed-rate mortgages, the most common way to loan for a home, are at the moment very, very low, with terms stretching out to either 15 or 30 years. These mortgages offer a fixed rate over an agreed-upon length of time.

On the other hand, adjustable-rate mortgages are those that apply varying interest rates over the course of the loan’s duration, depending on the outstanding balance. These loans can be used to obtain much-needed funds for short-term needs like the ability to repair or renovate a property, or to do property flipping, and so on.

4. High rental returns 

Renting out real estate properties is a great source of income and can be the key to building your wealth. Rental payments from your real estate investment can be considered as a good and consistent income stream that, despite some slumps that might occur in certain years, will ensure a steady cash flow.

Rental return means, per Legal & Financial Group, Navado, is “usually a percentage representation of the amount of rent that you receive compared to the value of the property or mortgage amount.” As property owners, it is important to keep in mind the rate of rental returns. In this way, it’ll be easy to constantly check the efficacy of the rental property as an investment.

Further improving your property from the same cash flow that your property brings also increases the potential of gaining higher rental returns. Making proper improvements to your real estates, such as installing solar panels for energy, replacing old appliances and furniture with modern ones, remodelling old-style rooms and bathrooms to be more up-to-date with current styles and trends, will boost the property’s value.

This not only sets the rise of rental returns but also actually increases the value at sale. Should you choose to liquidate your property for whatever reason, these improvements would add more value to the final sale than what you initially put in.

With the rapid increase in population, there’s a high demand for residential and commercial spaces—either to be rented or to be bought. Major cities draw in both local and foreign populations, most of which opt to rent out spaces, most especially when their purpose is just for work or for something temporary.

Also, there’s what we call “Generation Rent.” These days, young adults prefer to rent out living spaces, instead of buying real estate. Most commonly, these people, usually ranging from 18 to 40-years-old, are categorised as those that “have been priced out of the housing market.”

The young adults of this generation usually struggle to balance paying out outstanding student loans and high cost of living, while only receiving low wages. The housing market is becoming more expensive right now. House prices in the UK are predicted to “increase by an accumulative 20.4%” from 2020 to 2024.

That said, buying houses may not be a big priority by the masses as of the moment, which means a good opportunity for real investors to gain high rental gains.

5. The real-estate property allows for continuous investing 

As discussed above, the rapid increase in population and the growth of Generation Rent are two big factors that push real estate investors to continuously invest in properties—to feed on this fast-growing market. In short, real estate properties are self-sustaining assets.

This is perhaps the best reason to get into real estate investing: The ability to keep on investing, and in turn, open up other opportunities for an increase in cash flow. While other industries and markets can greatly be affected by external factors taking place in the world, the real estate market can stay quite resilient.

This type of financial venture allows people to be able to gain much-needed equity to continuously invest. This equity pulled from properties can be used to invest in even more real estate, if you choose to, or in other businesses that could also yield good returns.

6. Global competency of real estate investment

In places like the UK, foreign direct investment (FDI) has risen over time and as such, it is now considered as a lucrative choice for investors. Foreign investors choosing real estate as an investment is a definite option. This can be done by actual direct ownership or through entities that will hold the investment for the foreign investor.

However, when doing this, transparency is key and it is important to consider the stability and security of the market as a foreign investor. Countries that rank high in the Global Transparency Index will be the safest option for investment—with the UK, US, Australia, and France being at the top of said list.

7. Property remains a stable alternative

Whereas stocks and other forms of investment may have erratic fluctuations over time, the value of real estate properties can be extraordinarily robust and stable even through crises.

For example,  In the UK, despite the economy shrinking by 20% during the second quarter of 2020, a year ravaged by the COVID-19 pandemic, house prices increased by 1.7%, and real estate transactions had an upward trend.

While major recessions can cause real estate values to drop, the bounce back happens quick and can even cause rental returns to rise afterwards. For instance, it has been predicted that the rental price in the South East could increase by 11.5% over the next four years.

Is Real Estate a Good Investment?

Real estate is, indeed, a good investment as listed above. With the right choices, your real estate investments can become great investments. To ensure that your potential investment is the best that it could be, some factors should be considered and these are:

1.) Location – As with any business, location is key. The location of the property will determine the kind of potential tenants and clients for your real estate investment. Not only that, the proximity to other critical areas like schools, commercial centres, hospitals, and so on, can also determine your rental rates and property value.

Safety and security should also be considered when looking at locations. An area with criminal activity can deter potential clients and definitely lower your property value, so keep this in mind.

2.) Property Tax and average rent – Check if your target rent can manage to cover the area’s property tax rates and still yield profits for you. Property taxes are different from area to area and are determined by a lot of factors. Also, do not let the first impression of a high property tax number determine your decision.

Some areas with low property taxes might seem appealing but other factors can affect your investment negatively. Likewise, an area with high property tax might seem like a bad area to settle in but in reality, could mean a more stable and appealing area.

3.) Local Economy – The target area’s local economy can affect your investment. Specifically, it can determine the density of possible tenants and clients for your real estate investment. For example, if a town has a local office of a global corporation about to open, this will surely attract possible employees moving into the area and could be a great opportunity to turn them into clients.

4.) Weather, climate, and natural disaster risks – These factors are well beyond the control of man, but can still be studied to see if an investment is worth making in that area. This can also determine what kind of property is most suitable to invest in, what amenities the said property should have to attract tenants the most, and the amount of expense insurance will be in the long run.

5.) Future plans – A town or area that is showing signs of even more development could translate to increasing property values over the years. Make sure to check if property development projects are happening in your target area to ensure you can maximise your investment.

While you can research these elements and similar ones that can determine the quality of your investment on your own, getting help from a property investment consultant can make the process much faster.

Ways to Invest in Real Estate

There are many ways to invest in real estate and even ones that can be done without having to leave the comfort and safety of your own home. Here are a couple of options you can take to start investing in real estate:

1. Rental properties – Purchasing a rental property is one of the most common ways of investing in real estate. This will turn you into a landlord and give you a tangible property of your own, with all the listed benefits above, and a guaranteed monthly revenue stream.

While it might seem like this kind of investment will make money by itself (which it does), it does not mean there is no active involvement from you as the landlord. Like any other businesses, this requires active monitoring and participation from the business owner.

Oftentimes this requires the landlord to have a separate maintenance team, which is usually outsourced to other management companies.

2. House flipping – The basic premise of house flipping is simple: buy low, renovate, and sell high. However, the process itself is more complex. But if done right, it can have fantastic yields and could bring in big money.

Ambitious investors can work on multiple properties at the same time, investing big sums of money to purchase several properties with the aim of “flipping” them all for huge profits.

Although, this requires a lot of skill to pull off. Nonetheless, many find that the potential rewards outweigh the risks, and as such, sees property development as a lucrative option.

3. REITs – Investing in Real Estate Investment Trusts (REITs) is similar in concept to investing in stocks and is considered as the easiest way to get into the real estate investment market. You only need to give money to a company who, in turn, will purchase the property for you. The profit comes from when the purchased property appreciates and dividends are distributed.

REITs are easy to get into in the sense that just like stocks, you don’t need to put in huge amounts of money to be able to invest in real estate. In some cases, REIT investing can start with just a few hundred pounds. And just like in stocks, there are many kinds of REITs, such as equity and mortgage. With proper knowledge and the right help, you can maximise your investment.

4. Online Real Estate Platforms – Similar to the concept of crowdfunding sites, investing through online real estate platforms is perhaps the most convenient way to get into real estate investment. These platforms allow you to be connected to residential or commercial property development companies looking for investors to fund various real estate projects.

In return, these companies promise a variety of distributions over the course of months or years. The difference between this and REITs is that you cannot liquidate or trade your investment easily, should the need to do so arise.

How Has Real Estate Performed As An Investment?

Real estate is the go-to investment choice of the wealthy, and according to billionaire Andrew Carnegie, “90% of millionaires” got rich because of it. In the UK, demand for housing has increased despite the supply staying relatively the same, and because of this, rental prices tend to increase steadily over time along with the average values of real estate.

As mentioned, the booming growth of Generation Rent has pushed investors to purchase buy-to-let properties, or properties acquired to be let out—rented out.

In a recent survey by Totally Money, it was observed that buy-to-let properties near or within a “high student population offered the highest yields.

Peer-to-peer lending, on the other hand, is a great way to get bigger returns out of your money for a lot less work due to the ease of its online accessibility. P2P platforms give you flexibility too, allowing you to choose individual loans or simply let the platform do the work for you.

Property ISA is also an option, which specifically uses your cash to invest in real estate. These real estate options are vetted by experts who will put your money in the best possible real estate options available. These options can either be a property-related business or shares related to property.

The right real estate investment appreciates over time and performs great for long-term investment goals. Unlike the stock market, whose stability is very volatile regularly, real estate is much more stable for the long haul.

Why is real estate a risky investment?

As with all investments and businesses, there are still some risks in real estate even though it is a very safe and lucrative investment option. Here are some of those risks:

1. Losing capital – Depending on the kind of real estate investment you make, possibly the main and biggest gamble you will take, is risking the capital needed. It can take quite a bit of capital to purchase and rent out a property, for if things go south, can mean trouble on a financial level.

2. Sinking a lot of time – This goes hand in hand with capital and monetary risk. Getting monetary gains from a real estate investment can take time, most especially when you’ve done massive property development. Months, years, and sometimes even decades pass by before the significant yields are felt.

3. Damage and destruction to property – This can take place in the form of bad tenants who may cause property damage that will require repair and renovation, on top of the legal headaches that may arise, or accidents and natural disasters. Rebuilding from scratch, even with insurance, can be a very costly and time-consuming process that can test even the hardiest investors.

In conclusion, despite the potential risks involved in real estate investing, venturing into this field entails great financial promises. The benefits of a regular and constant revenue stream, coupled with a self-sustaining asset that appreciates over time and can be passed on to your kids and beyond, make real estate investment an option that’s worth considering.

It is always recommended to partner with a property investment consultant, to help guide you in this lucrative venture. Not only does this minimise the risks, but also helps you leverage your investment plans.

Getting into real estate investment can be done at any time, with the amount of information available on the internet. But having the assistance of a property management service, such as Terra Property Consultancy, will make things easier, especially if you’re inexperienced. Our services support you in the process from start to finish, by offering consultancy options, portfolio management, investment strategising, and much more. If you’re ready to take one step closer to your goals, send us an email at [email protected] and one of our friendly experts will be in touch.