An Understanding of Real Estate Investment

April 3, 2024

 

The first thing that comes to mind when you think of real estate investment is your home. Of course, real estate investors have many other possibilities when selecting the right investments, but they're certainly not all physical assets.

What is Real Estate Investment?

Real estate has grown into an investment vehicle of great popularity in the past 50 years. Real estate is a great way to improve the risk-and-return characteristics of a portfolio that investors invest in, with risk-adjusted, competitive returns. In general, the market for real estate is a low-risk investment, particularly when compared to equity and bonds.

Here's a look at a few of the most popular options for individual investors and the benefits of investing.

Historical Prices

The real estate market has been regarded as a safe investment, and with valid reasons. Prior to 2007, previous data on housing prices indicated that the prices could rise for a long time. In all but a few instances, the average price of properties in the U.S. increased each year between 1963 and 2007, the year of the beginning of the Great Recession.

The prices of homes did take an eminent hit following the beginning of the COVID-19 pandemic in the spring of 2020. As vaccines began to be distributed and the threat of pandemics diminished, the prices of homes climbed to all-time levels in 2022.

This chart is from the Federal Reserve Bank of St. Louis and provides average sales prices from 1963 until Quarto 1 2022 (the most current data available). The areas highlighted in light grey are indicative of U.S. recessions.

Rental Properties

Assets today play a crucial part in shaping our perception of real investment in real estate. The range of properties includes traditional residences to the most innovative commercial ventures. Today's landscape is a complex and diverse real estate investing complex.

  • If you decide to invest in rental properties, you'll be a landlord. It would help if you thought about whether you're comfortable being a landlord. As a landlord, you'll have to be accountable for paying the home's mortgage, taxes on property and insurance, as well as maintaining the property, locating tenants, and handling any issues.
  • If you do not engage a property management company to manage the details, becoming a landlord is a direct investment. Based on the circumstances, managing the property and the tenants is a 24-hour task, which is only sometimes enjoyable. If you pick your properties and tenants with care, you will lessen the likelihood of significant issues. One way landlords earn cash is through collecting rent.
  • The amount of rent you are able to charge is contingent on where the rental is situated. However, it's difficult to decide on the desirable rent, as if you charge too much, tenants will be pushed away, and if you are charging too low, you'll leave cash in the bank. A typical strategy would be to set a price-satisfying rent that covers costs until the mortgage is paid. After that, the majority of the rent will be made from profit.
  • Another method by which landlords earn cash is via appreciation. If your property increases to a certain extent, you could sell it for profit (when it is time) or use the equity to fund an investment in the future. Although real estate tends to increase in value, there aren't any assurances.
  • This is particularly the case when there are a lot of fluctuations in the market for real estate, especially during the COVID-19 pandemic. From February 2020 until March 2022, the median prices for real estate within the U.S. rose by an incredible 38%.
  • Federal Reserve Bank of St. Louis. FRED Economic Data. "S&P/Case-Shiller U.S. National Home Price Index (CSUSHPINSA)." The rapid increase in prices has led to many wondering whether prices could be due to a crash.

Flipping Houses

As with day traders, that is a long way from the buy-and-hold investor flippers, who are real estate investors who are a distinct breed from the landlords who rent out their properties to buy and rent. Flippers purchase homes with the intent to hold them for a limited period, usually less than three to four months, before selling them at an income.

In order to flip a house, there are two major methods:

Repair and upgrade.

It is a method to purchase a home that you believe could rise in value through some repairs or updates. Ideally, you finish the project as quickly as you can and then sell the property at a price that is higher than the total cost (including the work you have done).

Hold and then resell.

Flipping is a method of making money differently. Instead of buying a house and then repairing it to sell it, you purchase it in a market that is rapidly growing, hold it for a couple of months and then sell it for a profit.

You may not be able to make profits if you flip a property in either case. It could be a problem since flippers typically need satisfying funds in their accounts to cover mortgages on homes for the long term. However, flipping is an excellent option to invest in real estate if it's done properly.

If your home grows by value, then you could sell it for profit (when it is time) or use the equity to fund the next purchase. Although real estate tends to appreciate, there are only so many guarantees.

This is particularly the case in times of extreme fluctuation in the real estate market, particularly during the COVID-19 pandemic. From February 2020 until March 2022, the median property prices across the U.S. rose by an incredible 38%. The astronomical rise has made many wonder whether prices could be due to a crash.

REITs

An investment trust in real estate (REIT) is formed when a company (or trust) is established to make use of funds from investors to purchase or operate and then sell properties that produce income. REITs are traded through major exchanges, just like exchange-traded funds and stocks (ETFs).

In order to be a REIT, the company must give out a minimum of 95% of its tax-deductible profits in the form of dividends paid to its shareholders. This way, REITs do not have to pay corporate income tax, while regular companies are taxed on profits, which would eat into the profits they could pay to their shareholders.

Similar to regular dividend-paying stocks, they are suitable for investors seeking regular income. However, they also offer the possibility of appreciation as well. REITs are invested in a variety of real estate, such as malls (about one-quarter of all REITs specialise in malls), mortgages, healthcare facilities, and office buildings. Comparatively to other forms of real estate investment, REITs benefit from being extremely liquid.

Bottom Line

Real estate is an excellent investment with an opportunity to give steady income and create wealth. However, the main drawbacks to buying real estate for investment are the need for more liquidity and the difficulties in changing an asset into cash and cash into assets.

 

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