Why Should You Invest In Real Estate?
Investing in real estate can be a winning strategy to grow your wealth and build a strong investment portfolio. Real estate can provide a steady cash flow in the form of rental income and offers many tax benefits. Let’s look at some key reasons you should start investing in real estate and how to find good real estate investments in any market:
The Leverage
Unlike stocks, bonds, and mutual funds, you can use borrowed capital with real estate. You aren’t limited to the constraints of your own money. Instead, you only need a downpayment of 5 to 20% to start real estate investing. For example, you can put $20,000 down on a $100,000 single-family home and receive a mortgage from the bank for the other $80,000. You can collect any rental income while the house appreciates in value. When you sell, you get to take the profit from the equity increase.
Good Real Estate Investments are a Strong Hedge Against Inflation
Private real estate is considered a good hedge against inflation. Because it has little direct correlation with the ups and downs of the stock market, the real estate asset class is somewhat protective against inflation.
If you buy a property today, in 5 to 10 years, you’ll likely be paying less for your mortgage than you would if you were to rent that property. As the value of real estate rises with inflation, you reap the rewards of the increased home equity but have your payment locked in at a lower value. While everything else rises, your housing costs can stay the same.
Reliable Growth
Even though the real estate market fluctuates in the short term, it has continually trended upward in the long term.
In 2012, the median home price was just $110,000 following a major market drop in response to the 2008 housing crisis. Ten years have passed, and home prices are at an all-time high. The median home price in 2022 is now roughly $322,000. It’s a far more stable investment for the long term than individual securities. Plus, the value of a home can always be improved with updates, renovations, and other maintenance activities.
Cash Flow
With just a few properties, you can secure a very healthy cash flow. If you imagine a few rental properties pulling in a few hundred dollars more a month than your mortgage, that’s money in your pocket. You should always put money back for maintenance and other property management duties, but if you’ve selected the right properties (minimal mortgage capable of pulling high rents) you should have a nice chunk left over.
4 Secrets to Finding Good Real Estate Investments
1. Prioritize Off-Market Properties
Off-market properties are properties that are not listed on the MLS. The Multiple Listing Service is a great resource for standard real estate transactions, like when a family moves across states and needs to buy a new house, but it’s not ideal for finding real estate investments. Because the MLS is the primary listing source for traditional real estate, the competition is high for those properties.
By prioritizing off-market properties, you are seeking out properties that aren’t ‘officially’ for sale. Off-market properties have less competition, so you can work with the owner or other connections to figure out a deal that works for everyone. These properties are best found through networking, direct mail campaigns, or the public record.
With direct mail campaigns, you can let homeowners know that you are in the business of buying real estate. If they have already considered selling, your letter might convince them to reach out. And the public record can provide information about impending foreclosures. Distressed homeowners might be looking away to get out from under their mortgage.
2. Let Your Network Know
Every time you connect with a family member, friend, acquaintance, or coworker, you want them to know you are looking to purchase real estate. Then when your aunt hears that Bob down the street is looking to sell his house, she might reach out and let you know about this potential opportunity.
Working your network can be a great source of leads for good real estate investments. Real estate agents, contractors, builders, tradespeople, and other individuals that regularly interface with homeowners, can relay any signals that a homeowner is ready to sell.
3. Rehab Properties
Don’t overlook rehab properties just because they look ugly on the outside. Fixer-upper properties can come at a steep discount because average buyers don’t want to do a lot of work when they purchase a house. If you aren’t afraid to put in the sweat equity (or contract out the work), you can make really good on your investment.
When investing in rehab properties, you strategically choose properties so you don’t end up too far in the hole. Here are some things to look out for and consider:
- What are the comparables? When the property is renovated and finished, what is the expected market price? Or what is the expected monthly rental rate?
- What is the nature of the needed work? Is it mostly cosmetic work? Do bathrooms and kitchens need to be remodeled? Are there any structural concerns?
- What is your renovation budget? Is the work needed in line with your budget? Can you contract out all the work, or will you need to save money by doing some of it yourself? What kind of breathing room do you have for any unexpected renovation costs?
4. Identify a Good Location to Own Real Estate
Real estate will always move in prime locations, even in slower markets. If you want to find a good real estate investment, thoroughly research your area of interest. Take the time to learn the popular established neighborhoods and up-and-coming trendy areas. Know where the shopping areas are and where the good schools are.
In essence, the ‘location, location, location’ mantra you’ve heard many times before is about identifying areas where people want to live. Many factors influence how desirable a location is for homeowners, but here are a few key ones you should know:
- Proximity to metropolitan areas/ Workplaces – for example, bedroom communities near cities are highly desirable
- Nearby shopping, healthcare, and other amenities
- Proximity to good schools
- Forecast for growth in the area
- Proximity to thriving communities and cultural events
- Not near any major highways, airports, railroad tracks, or main power lines
- Close to outdoor activities like parks, trails, and waterways
- Historic areas experiencing a revitalization
You want to invest in properties with at least a few of these markers, especially if you are looking to flip the property or turn it into an income-generating rental.
Learn Build Profit is a financial literacy blog providing expert insights on income investing and passive income generation through dividend stocks and real estate.
