Investing in Real Estate - Is it for me?
The thought of investing in real estate can bring out various emotions in different people. Some people thrive on buying and selling residential and commercial property (with some making a living out of it), while others are filled with fear and apprehension at the very thought of even buying their first home, thinking that it may be financially out of their league. The reality is that investing in real estate is one of the best investments you can make... and it's never too late to start. If you already have some form of an investment portfolio (this may include the stock market, bonds, company shares and assets) real estate is a valuable addition to add diversification. Investment specialists advise against "putting all your eggs in one basket" which could expose you to the risk of potential loss. We highlight the top reasons for investing in real estate, why it is a sound move and cover some of the associated pros and cons.
Why is Investing in Real Estate a Good Move?
Real estate is a long term, appreciating asset. There are dips and peaks in the property market but, generally over the long term, the asset will appreciate, assuming the structural integrity is maintained.
Many people invest in property to set them up for retirement - either to live off the rental income or to sell the property and live off the profits. Investing early in real estate can give you peace of mind as you go through life, knowing that you have a nest egg that is secure.
Investment advisors will tell you that there are not many available investments where you can leverage your initial capital to enable you to invest in assets with a higher value. With real estate, you can start with an initial down payment / deposit for an asset that has a much higher value. For example, if you have P100,000 to invest this would only buy you P100,000 worth of stocks. On the other hand, if you use this as a deposit on property you could (with a good credit record, stable income, and bank financing) potentially buy a house worth P1,000,000. As time goes on, you pay off your loan which means that you ultimately own more of your asset, allowing you to explore further options.
Real estate will naturally appreciate over time, averaging about 5% - 8% per annum, assuming that the asset is maintained in a good state. In addition to this, the appreciation of the property can be increased by upgrades, renovations, or repairs. However, not all renovations can increase a property's value and you could over capitalize the property. In some instances, simply adding a garage or swimming pool to a property could increase its value. It is best to speak to experts and your estate agent before embarking on upgrades in a bid to increase the value of the property.
There are tax benefits to owning property that you can explore. Before going any further, it is important to note that you should always speak to a financial advisor or tax specialist when exploring these options.
Owning a property can be like owning a business and there are several expenses that you can write-off:
These are great benefits to being a property owner.
If you own a property and rent it out for more than your loan repayment, you can earn additional monthly income. Obviously, if you do not owe any money to a financial institution, the whole of the rental income is at your disposal. There is always a risk that your tenants may default or cancel their rental contract early, but there are risks associated with every investment. Good, happy tenants rarely default.
As your property's equity increases, you can use this equity to finance further property investments. For example, if you have P500,000 equity in a home, you could refinance the mortgage on that and use that money on the deposit for your next property investment. As time goes on and depending on the value and appreciation of your investment, you may even be able to pay cash for future property investments.
Other than the traditional "buy to rent" method there are alternative ways to invest in real estate.
What is a good property to invest in?
This is a very common asked question, and something that nobody has the "million dollar" answer to. However, years of property investment trends has shown some common themes and pointers to look for when finding a good investment property.
Know the possible downsides to real estate investment.
As with any big decision you make, it is best to be aware of the negative possibilities of taking a big step. Understanding the pros and cons of an investment will help you make more informed decisions.
As with any investment made, there are no guarantees that you will make profits. Certain factors can have an influence on the potential that your investment has such as government policy, socio-economic factors, environmental factors, even the current pandemic. However, fortunately, if you are patient and can ride out any dips in market demand, the property market usually bounces back.
If you have tenants in your property, you have no guarantee that they will not default or cut short their rental agreement. In this instance, the mortgage repayments would fall on you to cover, unless you are fortunate enough to get a new tenant immediately. You should possibly have enough reserves to cover the mortgage repayments for several months should this happen.
In order to get bank financing, you would need to have (amongst other things) a good credit rating and a stable income, and in some instances this may not even be enough. Raising enough money for a deposit can also hinder your investment plans. Financial institutions will have certain factors that they will look at before issuing any property loans and these are determined by their market research and analytics.
In conclusion, investing in real estate is a sound way to diversify your investment portfolio and there are many advantages in doing so. Ultimately, real estate investments are a long-term investment and not a quick way to make money, you need to have patience and a broad understanding of how these investments can work to your benefit.