Real Estate Investment – What it is and Why You Should Do it.
Investing in real estate is one assured strategy in investment as it is satisfying and lucrative. You make a lot of money in real estate and end up keeping most of the money you make.
Real Estate sector has had a significant role in driving the world economy.
For these reasons, people have been investing their money and time into real estate for centuries and decades.
When we talk about Real Estate, think of physical properties you see every day on your way to work, in your neighborhood, etc. Think of the building you work in, the commercial buildings in the city, and the piece of land you see on your way upcountry.
Also, think of the apartment building you live in by paying rent monthly and even the home or the house you bought with a mortgage.
Real Estate is widely associated with long-term investment plans. Simply because these properties as an investment appreciate in value as years go by and as the real estate market trends change.
The value of that piece of land you see ‘bare’ or just ‘seated’ in a non-developed area will not be the same 5 years from now or 30 years from now.
Since the early years of human existence, land was and still is being used as a measure of physical wealth and riches. From when kings ruled kingdoms, the more land you had, the richer and the more powerful you were.
Rich people know the benefits of investing in real estate and that’s why they invest in it.
Types of Real Estate.
As mentioned briefly earlier, real estate is an immovable property in the form of land or a building.
Real estate also furthers as the right to the air above and below the land and the natural resources on the land – minerals, water, or crops.
‘Real’ in the real estate indicates or represents something tangible/physical. Therefore Real Estate basically refers to physical property in these 4 forms/ types.
- Residential property
- Commercial property
- Industrial property
- Vacant Land
Residential Building/Property.
When you talk of real estate, the residential type of property comes into the minds of many.
Residential real estate involves property or properties meant for residential purposes and with high value. Think of houses (single-family homes, townhouses, and condominiums), holiday/vacation homes, etc.
The homes are either newly constructed or up for resale and a flip. As a real estate investor, you can either buy or sell a house, home, townhouse, condominiums, etc.
On the other hand, you can build these properties from the ground up, and put them up for sale or for rent. You get to make more money than you used to build the property.
Commercial Building/Property.
Commercial real estate revolves around buildings/properties used for commercial purposes. These include offices, shopping malls, hotels, hospitals, schools, and apartments.
When you own apartments, although residential, they are considered commercial since they make an income/profit for you.
Industrial Building/Property.
This is a building/ property used for manufacturing, production, research, storage, distribution/ shipping of goods/ merchandise.
Think of factories/ processing plants, industries, and warehouses. They are used by companies that need large space for bulky equipment and storage for raw materials or goods.
Land.
Land that is vacant or being used for farming purposes – farms and ranches – are considered part of the real estate family.
Vacant land can be land that is not developed, is in the early stages of development, being re-used/ on lease.
You might have a land that has natural resources such as minerals, crops, or a river/ source of water passing through it.
What is Real Estate Investing?
If you are Buying, Owning, Managing, Renting, or Selling real estate for-profit purposes, that is real estate investing.
Why You Should Invest in Real Estate.
The Cash flow through real estate income.
Most people in real estate earn through the payments they receive every month for leasing out their property to tenants.
Lease your property on a monthly or yearly basis and receive money after the agreed period of time.
You get cash flow from the rental income from renting/ leasing out your property. The cash flow can help you take up other types of investment or pay up your mortgage.
You can even channel a good percentage of your Real estate income to your retirement investment plan.
The Value Appreciation of real estate property.
Real estate properties tend to appreciate in value as time goes by and as real estate market trends change.
Value appreciation of real estate depends on several factors such as demand and supply. Additionally, population growth in an area, economic inflation, cost of borrowing home loans, and loan interests influence appreciation.
For example, let’s take a look at a piece of land. You buy land this year and it will have a different market value 10 years or even 5 years from now.
Land bought in an undeveloped area will increase in value as the area gets developed and increases in population thus increasing the demand.
Home properties also have great potential to increase in value over a period of time.
Tax deductions on property depending on use.
The local government deducts taxes on real estate property after property value assessment is done annually. But, depending on several factors, these taxes can be reduced.
You can apply tax deductions on your properties and this works perfectly for property meant for personal use such as homes, etc.
Consider using depreciation as a ground for a tax deduction. You can reduce the cost of your real estate properties over its useful life and have some tax deducted.
Clearly, you cannot compare the value of a newly constructed building to a building that has been used for 28 years or 50 years.
Consider the wear and tear factor – the longer the time a property has been in use, the lower the cost from the initial value.
As you get a deduction in the amount of tax you are charged for the property, you save yourself some money.
Building Equity and Wealth.
Real estate property is wealth itself and you can use it to build more wealth as time goes by.
For example, you can use the real estate income you get from leasing or renting your property to get other assets. You get more cash flow from these assets thus increasing your wealth.
Use your real estate property to build equity – increasing your net worth if you were to sell the house/home after paying off your mortgage.
Think of this, as you pay your mortgages, you are increasing your equity. The difference between the market value and the amount you owe the bank for the house/home, etc.
This is why real estate is considered as the best investment strategy if done right and smartly.
Leverage in Real Estate.
Almost every real estate investor uses leverage as a real estate investing strategy. They want to know the rate of returns they would get from the money they are investing in.
Most people acquire real estate property through mortgages from banks and other financial institutions and this works for the smart ones in real estate.
You can use your real estate property as collateral to raise funds or acquire another type of property.
Leverage in real estate revolves around using borrowed money – mortgage as mentioned above – to acquire/ buy a property.
You get to use other people’s money to buy a property before you use your own. With this, you can spread the capital you are willing to use in real estate to acquire several properties at the same time.
When buying a property, the bank will assess the value of the property, your credit score, the return interest of the property and the interest rate of the loan.
This is how it works, the return interest of the property you are investing in is higher than the interest rate of the loan you are getting from the lender. Therefore, you get the money difference between the two rates.
You get to have a cash flow and increase and build your equity and your wealth with leverage.
Conclusion.
Real estate investing is something that’s not meant for everyone. Some get into it and succeed – build wealth and increase net worth. Others fail at it due to issues that come with real estate investing such as mortgage among others.
You have to do it properly and be smart about it to be among the successful real estate investors and you have to put the extra effort.
But if you want to build wealth and increase your net worth, real estate is the way to go if you do it properly.
