Why You Should Invest in Property
Real estate investment is one of the most popular choices for many investors. It is not hard to understand why.
Real estate investment is a low-risk alternative to diversify your investment holdings beyond the stocks and bonds. Compared to the conventional investment instruments of stocks (which only involve potential but volatile value appreciation and dividends) and bonds (which involve low dividends and interest returns), real estate provides for multi-faceted return on investment.
In today’s guide, we are giving you the most important factors which make real estate properties the best low risk investments and beneficial for your investment portfolio.
Multiple income streams through real estate investment
Generally, real estate investment yields two main sources of income: rental income and capital gains.
Firstly, renting is the true core of real estate investing. The beauty of rental properties is that demand will almost never end, subjected to the sacrosanct law of supply and demand. Rental properties will yield stable rental income, provided you consistently have tenants to rent your property.
Secondly, if your investment strategy is “buy, hold and sell”, you will gain income through capital gains. The resale value of the property will appreciate with rising prices and inflation rates over time, such as houses for sale in Kuching or in Kuala Lumpur. Increased value thus means possibility of a sale for profit and reinvestment in higher value properties, or even provide an equity line of credit for the purpose of other types of investments. However, do take into account that property value appreciation will be dependent upon the prevailing market value of your property. Thus, the best time to sell would be when the market value is greater than the intrinsic value.
Real estate investments are immune to inflation
Real estate has been historically viewed as one of the hedges against inflation. In other words, real estate investment is inflation-proof: it protects your money from the risks that inflation poses towards other forms of investments. In fact, there is a positive correlation between inflation and real estate value. Property values, and by extension rental income, run parallel to inflation.
When inflation and interest rates rise, buying property will become more expensive for average consumers. As a result, less people will qualify for mortgages and housing loans, thereby increasing the market and demand for rental properties.
Real estate investment affords existing rental property owners the ability to mitigate the effects of inflation by adjusting rental rates to match inflation. Just as the value of property will rise with inflation, the monthly amount in rent tenants pay can be increased over time to compensate for inflation. This enables the income generated through rental properties to keep pace with the general rise of prices in the economy, providing a cushion effect that allow consistent, if not increasing, rate of returns.
Even in times of recession or rising interest rates, existing loan or mortgage payments on the property will remain stable over time. Thus, rental investments increase cash flow without an increase in expense for owning and holding the property.
You are (mostly) in control of the value of property
Stocks and bonds, whose value and rate of returns are impacted by the effects of interest rates and inflation, are out of your control. Unlike these aforementioned forms of conventional investment vehicles, real estate investments are for the most part directly under your control. Other than the effects of the prevailing market value, you are in control of the intrinsic value of your property.
Although certain aspects, such as those relating to demographics and economics, are out of your hands, there are many aspects that you can control and manipulate to increase property valuation. For instance, repairs or improvements (such as renovations, redecoration or refurbishments) to the physical property can increase the value of property. In essence, you can manufacture equity through renovations. If the value of the improvements exceeds the cost, this results in an immediate increase in equity. Improvements to your property not only adds to the value of your property, but also increases the amount you can charge for monthly rent, which subsequently boosts your rate of returns.
Long-term stability and appreciation in value
The value and property price of real estate appreciates steadily over time. Take for example in urban areas that are getting more clustered. The number of new developments and buildings will decrease with the increasing space limitation. Thus, the value of existing real estate is bound to increase in value, assuming that the supply will be stagnant and limited in these areas and demand for these properties increase. Real estate investment thus affords long-term stability and value appreciation. This is in stark contrast to stocks, where value tends to experience more volatile fluctuations amid weak global economic growth, and to bond investments, where value tends to fluctuate with current interest and inflation rates.
Real estate investments have relatively low risk
Real estate investments are tangible assets. Unlike stocks and bonds, they are something that exists in reality. This is the feature that makes them low risk investments. For instance, the main risk associated with rental properties (the most popular type of real estate investment) is usually constant vacancy. The main risk you will face is a lack of rental income and consequently negative cash flow, as expenses will be higher than income. In this case, what makes this low risk is that you will always have a plethora of other options available to you. You can either ower your rent or try different rental strategies such as short-term renting. In the worse case scenario, you can always resell your property, recoup your costs and then buy another property in a better location.
Real estate investing can be done using other people’s money
Once again, real estate investments are tangible assets. This attribute and its low risk makes it attractive for those financing the acquisition. Thus, real estate is often bought with debt (a process called leverage). Leverage – the use of various financial instruments or borrowed capital to purchase and/or increase the potential return of an investment – can be used to provide greater return on investment.
With the numberless investment methods available, everyone is looking for the best one. The characteristic of the best investments are always the same: low-risk and high returns. Before you jump in head on into the world of real estate investing, remember that due diligence is the most crucial requirement in order for you to make sound decisions in investing. Thus, it is imperative that you do the relevant research and exercise caution in all your investment decisions.