Time and time again, the question of whether real estate investing is safe always crops up. Many look to real estate for financial freedom, from buying a rental house to building a long-term investment portfolio. Investing helps people earn passive income, giving them more time and money, the two things most people want in the world.
Here at Spot Blue, we see many people looking at physical property, and even those who only want to get their foot on the ladder with a family home, ask questions about types of investment. People no longer want to just build a house but also to ensure the home pays off financially and they get an annual return. This is good news because it means people are becoming more money-wise. So, as property agents, here is some advice on how to build your own real estate investment strategy.
Two Skills That Help Investors Choose Safe Investments
Knowledge: Just as much as a mechanic will look at cars or a banker will learn about money markets, every good property investor puts knowledge first. They treat investing as a skill or a trade that requires knowledge and regularly upgrading abilities. They learn about dividends, risky investments, property taxes, mutual funds, negative cash flow, monthly cash flow, buy-to-let mortgages, etc. They also know that investing constantly changes, and they stay abreast of their education to ensure they are one step ahead. Every good investor has a strategy.
Research: Among all the skills investors should have, research abilities are fundamental. Good investors never purchase based on a gut feeling or inside information. They get to know the local housing market inside out, and when they spot a property, they will do a deep dive to find out more behind the scenes. They learn about potential insurance premiums, annual management fees, agent commissions, expected upfront costs, predicted capital growth potential, structural risks, etc. A good investor will sign the dotted line on the contract, only when they are 100% certain of the purchase.
Benefits of Real Estate Investing
Potential for Income: One key benefit is generating passive income streams. By acquiring a rental property, investors earn consistent income to cover expenses like mortgage payments, management fees, and repairs while leaving room for profit. This stable income source provides financial security and the flexibility to pursue other ventures or retire early.
Leverage: Real estate offers leverage to control a property’s value with a fraction of the total investment. Investors amplify their returns by using borrowed capital, such as a mortgage loan. For example, suppose an investor buys a home with 20% deposit. In that case, they control the property’s total value and benefit from any appreciation or income generated.
Hedging Against Inflation: As the cost-of-living increases, so do income and property values. This means landlords can adjust rental rates to match inflation rates, ensuring income that retains purchasing power. Additionally, houses often appreciate over the long term, safeguarding against inflation’s eroding effects.
Diversification Opportunity: Investors can diversify their portfolios beyond traditional assets. This diversification provides a cushion against market fluctuations and reduces overall investment risk. Real estate’s low correlation with other asset classes allows for a more resilient portfolio during economic downturns, as the performance is not solely tied to stock market conditions.
High Tangible Asset Value
High tangible asset value is a critical concept that refers to the significant value of physical assets. Compared to other investment options, houses offer a higher asset value due to the inherent nature of physical assets. As properties increase in value in the long run, investors can benefit from capital appreciation.
Owning and leasing properties generates reliable cash flow, and regular income. Moreover, income tends to align with inflation, hedging against eroding effects of rising prices. Another advantage is reduced reliance on managers and debtors compared to stocks and bonds. Investors can directly manage and decide about their properties, allowing for a more hands-on approach.
Offers Long-Term Financial Security
Unlike the stock market volatility or other investment options, rental homes carry less risk. Moreover, equity is valuable when securing loans for future investments or personal needs. As the property appreciates, this equity can be leveraged to obtain low-interest loans, enabling investors to expand their portfolios or meet other financial goals.
Lastly, the potential for more enormous profits upon selling a rental property adds to financial security. Appreciation in property value, particularly in desirable areas, leads to substantial returns when selling. Investors enjoy considerable profits and secure their financial future by strategically investing in rental homes and selling at the right time.
Building Equity and Wealth
Building equity and wealth is a gradual process that yields significant benefits. It involves two primary strategies: paying loans and increasing property value. Paying loans is a critical step in building equity. As homeowners make regular mortgage payments, they reduce the amount owed and increase equity. Individuals build substantial equity over the years by consistently paying down the loan.
Historically real estate has appreciated, providing homeowners with a valuable asset. As property values rise, so does the accumulated equity, which is significant wealth. One main advantage of building equity is the potential to borrow against it. Homeowners can utilise their accumulated equity to secure loans for further investment. These borrowed funds are used to acquire additional properties or fund other investment ventures.
Portfolio Diversification
Portfolio diversification is to reduce risk and enhance returns by allocating investments across different assets. Investing in different housing markets means spreading risk across various geographic locations. For example, an investor can diversify in commercial properties in other cities or countries. This strategy helps mitigate localised economic downturns by distributing investments across multiple markets.
An investor can also allocate funds to residential properties, commercial units, retail properties, or investment trusts (REITs). Each type of investment offers different risk and return profiles. By diversifying across property types, investors balance income-generating properties and properties with high growth potential.
Reducing risk through diversification is crucial in navigating volatility. As the saying goes, “Don’t put all your eggs in one basket.” By diversifying a portfolio, investors minimise a single investment’s poor performance. A diversified portfolio will deliver stable returns instead of experiencing substantial losses due to a downturn in one market or property type.
Tax Benefits on Real Estate Prices
Several tax benefits help investors reduce their overall tax liability. One significant advantage is the lower taxes on rental property income. Rental income is taxed lower than regular income tax rates, resulting in potential tax savings.
Additionally, there are various deductions to take advantage of. One notable deduction is the ability to deduct mortgage interest payments. This deduction significantly reduces taxable income, allowing investors to keep more rental profits. Another tax benefit is claiming depreciation on the property. Investors deduct a portion of the property’s value over time, providing additional tax savings.
Flexibility and Choice
One option is purchasing fixer-uppers. These properties often require renovations and improvements but sell at lower prices. Investors make necessary repairs and sell the property for a higher price, thus generating profit.
Another popular option is rentals. By purchasing and renting a property, investors generate steady income streams and potentially enjoy property appreciation. This income allows investors to earn money regularly without participating in day-to-day operations.
Real Estate Investment Trusts (REITs) provide yet another avenue. REITs enable investors to own shares in a professionally managed portfolio. These trusts offer diversification as investors gain exposure to various properties and locations without the hassle of direct property ownership.
A significant advantage is flexibility. Unlike other investments, there is no limit on the number of properties. Investing in multiple properties or types maximises potential returns and secures their financial future in dynamic markets. As house values tend to appreciate, it is an appealing asset class for long-term investors.
Real Estate Risks to Be Aware Of
Financial Risks: Real estate requires significant capital, and investors must be prepared to face financial risks. Market fluctuations, economic downturns, or unexpected expenses impact profitability and cash flow. Additionally, securing financing is challenging, especially for first-time investors with limited credit history or assets to offer as collateral. Investors must assess their financial stability, and have contingency plans to mitigate potential financial risks.
Market Instability: Housing markets experience fluctuations and volatility, which impacts investment returns. Interest rate changes or consumer preference shifts influence values and income. An investor’s ability to accurately predict and navigate these market changes significantly impacts their success or failure. Conducting research and staying informed about current market trends is essential for investors seeking to minimise market instability.
Management Challenges: Landlords and property owners are responsible for maintaining properties, managing tenants, collecting rents, and addressing issues. This is time-consuming and may require expertise in property management, contract negotiation, and legal matters. Investors may choose to hire a management company, which adds an additional cost that eats into profitability. Investors must consider their ability and willingness to take on maintenance responsibilities.
Vacancy and Tenant Risk: Those who plan to rent out an apartment or house face the additional hurdle of occupancy rates. This is a significant factor for holiday home rentals. For long-term tenants who are giving you your monthly income through rent, in most countries, they have rights. It would help to research these to ensure you obey the law.
Repair Costs: Nobody wants it, but there is also the risk of something significant happening that causes big setbacks. This might be a major flood or a fire. We recently read a story about a couple that had to move out of their house because the next-door bamboo plant’s roots were growing inside their structural walls. Who could have foreseen that!
Unforeseen events like natural disasters pose severe risks. Disasters like hurricanes, earthquakes, or floods cause significant property damage, disrupt transactions, and decrease property values. One reason home insurance is so important is to cover the hefty cost of repairs, but landlords will also lose monthly income.
Liquidity Risk: Liquidity refers to how quickly a property can be sold to turn a brick-and-mortar investment into ready cash. Good liquidity is one of the hallmarks of a good investment. However, markets constantly change. The liquidity lessens if an area becomes run down or lacks amenities that turn buyers away. For this reason, it is essential to monitor markets and purchase prices. The first indicator of lessening liquidity is when businesses start moving out of an area and public facilities lessen.
Navigating General Market Risks
General market risk is influenced by various factors that impact the dynamics, overall economy, demographics, interest rates, inflation, government policies, and unforeseen events like natural disasters. Supply and demand play a vital role. Oversupply leads to decreased property prices, while high demand drives prices up.
The overall economy also significantly affects property markets. In times of economic growth, job creation, consumer confidence, and disposable income increase, leading to a higher demand for properties. Conversely, during economic downturns, demand declines, resulting in decreased values and increased risk.
Demographics shape markets by influencing demand for different property types. For example, population growth, age distribution, and lifestyle preferences impact risks because an ageing population increases demand for retirement communities.
Interest rates strongly affect affordability and attractiveness. When interest rates are low, borrowing costs decrease, making house purchases more attractive. Conversely, higher interest rates deter potential buyers and increase risks. Inflation erodes buyers’ purchasing power and increases construction and operational costs. This inflationary risk leads to reduced values and lower returns on investments.
Location Risk
Location risk is a significant factor to consider before making investment decisions. This concept refers to potential risks and uncertainties associated with the property location, significantly affecting profitability and overall investment performance.
One crucial aspect of location risk is housing demand. Investors should thoroughly analyse the local market to determine the demand for housing in a particular area. Population growth, job opportunities, and economic stability influence the demand for housing, and by investing in markets with high housing demand, investors maximise their income and potential property appreciation.
Rental rates also play a vital role in assessing location risk. Investors should evaluate the existing rental rates in the area to determine if they generate sufficient income to cover their expenses and generate a satisfactory return on investment.
Moreover, environmental risks associated with locations significantly impact investments. For instance, coastal areas like Florida face the constant threat of hurricanes, which cause significant property damage and affect the local economy. Investors should carefully evaluate the potential environmental risks before investing in such locations and consider factors such as flood zones, insurance costs, and emergency preparedness.
When researching, several key considerations should be taken into account. Analysing the market’s historical performance provides valuable insights into its growth and stability. Additionally, crime rates and school quality significantly affect values and rental demand.
Investors should thoroughly research these aspects to mitigate potential risks and make informed investment decisions. By assessing housing demand, rental rates, and possible environmental hazards, investors make more informed decisions that maximise their profitability and mitigate potential drawbacks.
Legislative Risk
Ah, the elephant in the room when talking about investment property, , and the bane of every investor worldwide. Naturally, property markets are closely monitored by governments. A poorly performing housing market or high homelessness doesn’t benefit the economy. In every country, there are changes to legislation at any given time.
Government policies and regulations, like tax incentives, zoning laws, and lending regulations, significantly impact markets. Changes in government policies have immediate effects on the feasibility and profitability of investments. This might mean new laws for property developments, access to loans, buying and selling procedures, or that dreaded capital gains burden. Unfortunately, this is one aspect that is not getting around.
Is Real Estate an Aggressive Investment?
Real estate is considered an aggressive investment depending on the approach and strategy employed by the average investor.
Aggressive Aspects
- Leverage: Using borrowed capital (mortgages) to get the sale price can amplify returns and increase risk. High leverage means a higher potential for both gains and losses.
- Speculative Investments: Investing in undeveloped land or properties in emerging markets yields high returns but carries significant risk due to market volatility and uncertainties.
- Flipping Properties: Buying, renovating, and selling properties quickly for profit is lucrative but requires substantial capital and expertise and carries much risk.
- Commercial: Investing in commercial properties (office buildings, retail spaces) is riskier due to higher initial costs and dependence on market conditions and business tenants.
Conservative Aspects
- Rental Properties: Purchasing residential properties to rent out can provide income streams, especially in stable markets.
- Real Estate Investment Trusts: Investing in REITs allows for exposure to the liquidity and lower risk profile of stocks.
- Long-term Holding: Buying properties in established areas to hold them for many years can provide stable, long-term appreciation with lower risk.
Risk Management
- Diversification: Spread investments across different property types and locations to reduce risk.
- Market Research: Thorough research and understanding market conditions, trends, and economic factors can help mitigate risk.
- Professional Advice: Consulting with professionals, financial advisors, and legal experts can provide valuable insights and reduce potential risks.
Property investing is aggressive and conservative, depending on the investment strategy. An investor’s risk tolerance, market knowledge, and financial situation will dictate aggressiveness. Those seeking higher returns with more risk might pursue aggressive strategies. At the same time, those preferring stability and income might opt for more conservative approaches.
Use Our Agent Services
So, that is our advice on how to make a safe investment. However, if you have questions about whether real estate investing is safe, contact us today and chat with an agent. There are many investment options, and all have their own pros and cons. Also, see our portfolio of apartments and villas for sale worldwide. Each listing contains everything you need to know, including contact details.
