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Today, buying real estate to redevelop or rent out is more accessible than ever before, and thanks to the growing crowdfunding market, you can get started for less than $1,000.
When it comes to real estate investing, there is a lot to learn. For instance, real estate syndication and crowdfunding while sounding similar, have a lot of distinction. That being the case, you might start by looking for more details about real estate syndication verses crowdfunding on websites like ArborCrowd.
But what makes property such an appealing investment tool, and why should those with capital to invest look towards real estate rather than other vehicles?
The first major benefit of investing in property is simply the potential to leverage your initial capital.
Consider this simplified example. If I have $50,000 to buy a property, and expect to make a 5% annual return then I should make $2,500 gross per year.
However when I use a mortgage and leverage other people’s money everything changes. Now I invest $500,000 – $50,000 of my own money, and the rest from a bank. Suddenly to make $25,000 per year.
I will, of course, have to service the loan I took out, which will eat up a fair chunk of this money. But assuming that I’m borrowing money at a rate lower than I’m earning it, my profits have grown. Perhaps I make $10,000 gross profit this year instead of $2,500. I have increased my income four-fold, without needing to invest any more of my own money.
While property markets ebb and flow like any other asset class, rental incomes tend to stay reasonably stable through good times and bad. Assuming I’m on a fixed rate mortgage, or even paid cash for my investment, I’m able to forecast my income reasonably accurately.
This makes cash-flow management easier, and ensures that the residential investor can always make reasonable plans for the future.
Some property investment companies even offer guaranteed yields to make these returns even more predictable.
Of course, buying rental properties doesn’t just bring residual income from the collection of rents. Held for long enough, you should expect your property to increase in value. Thus, your net worth continues to spiral the longer these assets are held.
If, and when, you decide to sell up you should find that your initial investment has multiplied considerably. As an example from the UK, it was reported recently that properties in the university city of Cambridge have increased in value by 15,000 per year for the last four years. Anyone who invested there stands to make an average of 60,000 in that time – just for having owned a property there.
Have you ever maligned how much things used to cost when you were a kid? Have you ever looked at the price of a candy bar or a magazine these days, and compared them to what they used to cost you? That’s inflation in action.
In 1960, the average US income was just $6,691 – by 2013 the average American household brought home $51,939. At the same time, many of us are still struggling to make ends meet.
The reason is simple: over time money is worth less and less. Take a $100 bill and put it under your mattress. In twenty years time that same bill will buy you a lot less than it will today.
In contrast to the devaluation of money, as we’ve seen property tends to increase in value over time. In other words, investing in property can be a excellent way to protect your capital against the risks of inflation, and keep it growing long into the future.
One final benefit of investing in property is simply that it is a physical asset – you can feel it and touch it. While this might sound odd, such an asset gives many people peace-of-mind. They’re not reliant on some computer system to remember how much money they have.
Furthermore, many investors find physical assets easier to understand. We can clearly see the difference in refurbishing a house. We can see that it is more comfortable, more pleasant, and consequently worth more. This is in contrast to some other assets – such as equities – which seem to go up and down at will. There is very little that the individual investor can do to influence this as they can with their rental properties.
This is not a rallying cry, nor an attempt to dismiss other asset classes. As any financial advisor worth their salt will tell you, diversifying your investments is the safest route to long-term success. Some investments may fail, while other succeed spectacularly. Overall, we aim for gradual, predictable asset growth.
Rather, the point of this article is to encourage new and experienced investors alike to look at property investing with renewed vigour. If you have perhaps been considering investing in property but have so far failed, perhaps 2017 should be the year that you look again. With so many benefits it makes sense to at least consider the possibility of investing in property.