However, the return on a property investment can be increased in a number of ways. Traditionally, many investors have turned to the stock market as a place to place their investment dollars. While stocks are a well-known investment option, not everyone is aware that purchasing real estate is also considered an investment. In the right circumstances, real estate can be an alternative to stocks, offering lower risk, higher returns and greater diversification.
Whether planning for retirement, saving for a college fund or earning residual income, individuals need an investment strategy that fits their budget and needs. Comparing a real estate investment to buying stocks is a good place to start. Investing in real estate or stocks is a personal choice that depends on financial situation, risk tolerance, investment objectives and investment style. Presumably, more people are investing in the stock market, perhaps because it does not take as much time and money to buy stocks.
If you are going to buy real estate, you will need to save and put down a considerable amount of money. For many potential investors, real estate is attractive because it is a tangible asset that can be controlled, with the added advantage of diversification. Real estate investors who buy property own something concrete for which they can be accountable. Note that real estate investment trusts (REITs) are a form of real estate investment and are bought and sold like stocks.
There are a number of considerations for investors when choosing between investing in shares or buying real estate as an investment. The following are some of the things to consider when it comes to real estate and the risks associated with it. The most important risk that people overlook is that real estate requires a lot of research. It is not something you can just casually jump into and expect immediate results and returns.
Real estate is not an asset that can be liquidated easily and cannot be cashed in quickly. This means that you cannot cash out when you are in a bind. For homeowners or rental property owners, there are risks involved in managing repairs or rentals. Some of the main problems you will encounter are the costs, not to mention the time and headache of dealing with tenants.
And you may not be able to put them off if there is an emergency. But if that country's economy is in trouble, or a political problem arises, that company's shares may suffer. Stocks are also subject to the economic cycle, as well as to monetary policy, regulation, tax revisions or even changes in interest rates set by a country's central bank. Other risks may come from the investor himself.
Investors who choose not to diversify their holdings also expose themselves to greater risk. For most investors, a large cash infusion is not necessary to get started in the stock market, which makes it an attractive option. Unlike real estate, stocks are liquid and can generally be bought and sold easily, so they can be relied upon in an emergency. With so many stocks and ETFs to choose from, it can be easy to build a well-diversified portfolio.
But, as mentioned above, stocks tend to be more volatile, which makes investing riskier, especially if there is a panic sell-off. Selling shares can give rise to a capital gains tax, which makes your tax burden much heavier. Some stocks move sideways for years Buying real estate requires more upfront capital than investing in stocks, mutual funds or even REITs. However, by buying property, investors have more leverage on their money, allowing them to buy a more valuable investment vehicle.
Real estate that generates monthly rental income can increase with inflation, even in a rent-controlled area, which offers an additional advantage. Another aspect to consider is taxes after the sale of the investment. The sale of shares often gives rise to capital gains taxes. Real estate capital gains can be deferred if another property is acquired after the sale, which is called a 1031 exchange in the tax code.
Investing in the stock market receives a lot of attention as a retirement investment vehicle, especially for people who regularly contribute to a tax-advantaged account, such as a 401(k) or an individual retirement account (IRA). However, diversification is important, especially when saving for the long term. Investors should opt for a variety of asset classes or sectors to reduce their risk. Investing in real estate is an ideal way to diversify your investment portfolio, reduce risk and maximise returns.
Keep in mind that many investors invest money in both the stock market and real estate. And if you like the idea of investing in real estate but don't want to own and manage property, a REIT may be worth a look. Real estate is a great way to diversify your investment portfolio. It can offset the risk of high-risk investments, such as money invested in the stock market.
In addition, if you invest in rental housing, you can enjoy the cash flow while the home appreciates in value, providing you with significant capital gains when you need them most - in retirement. Overall, real estate is a great investment option. It can generate ongoing passive income and can be a good long-term investment if the value increases over time. You can even use it as part of your overall strategy to start building wealth.
Investing in real estate is not just for the rich and famous. Anyone can do it, even if they only have a small down payment. With the right preparation and research, anyone can enjoy the benefits that real estate has to offer. If you invest in opportunity areas - neighbourhoods that need investment - you'll pay even less in capital gains.
According to these nine Oracles advisors, who have made millions investing in real estate, the answer is a resounding yes. Real estate provides cash flow If you invest in a buy-and-hold property, you can rent it out and get a monthly cash flow. It is also a tangible asset, and offers a number of excellent benefits, such as cash flow and appreciation (some equity investments offer this), but in addition to this, you also get leverage, which is using money from the bank to grow your investment. To invest in shares, you need a lot of knowledge and time to make sure you make money from them.
Buying real estate requires more upfront capital than investing in stocks, mutual funds or even REITs. Real estate is a long-term investment, which means you can hold it for several years while you wait for it to appreciate in value. The value of real estate rarely stays down and property values and rents tend to rise with inflation (depending on where you invest), which increases returns. There are many opportunities for investors to buy property and help the community by providing rents.
Most of the time, buildings and land appreciate in value, making your investment worth more than you paid for it. A REIT focuses on a specific type of real estate, such as apartment complexes, hospitals, hotels or shopping centres. In the case of investment property, real estate capital gains taxes can also be deferred through a 1031 exchange. If you want to leave a legacy, but don't think it's a good idea to go cash, transferring a property may be even better.
Work with an experienced real estate agent, look for comparable sales (comps) in the area and make sure you're making the right long-term decision. On the opposite, more ambitious end, you could aim for a condo conversion, where you buy a multifamily building, rent out the units, and later convert them into condos and sell them individually, says Dana Bull, a Boston-based real estate agent and real estate investor.