Many of the successful investors often tells me, if there were just one rule of successful investing it would be “start as young as you can.” Real estate like many other types of investment does also come with risks, but then again which business doesn’t involve any risks? We have heard of stories of people who earn their fortune through property investment but at the same time we also heard of stories of people who became unsuccessful in the real estate business. But one thing in common is that, they both took the risk as they know their returns will be worth it.
Real estate investments grow steadily over the time without major fluctuations in value and do not easily depreciate unless there is a major disaster in the area where your real estate property is located. Real estate is a long term investment as demand for houses is increasing every year, and the stocks are limited due to scarcity of land especially in prime area. This indirectly causes the value of real estate property increases over the long run.
The property market is usually much less volatile than the share market, at least partly due to the effort required in order to purchase a property – in terms of legal checks, due diligence, , inspections, length of settlement periods and many other factors. Properties in well located areas rarely crashes overnight or even over long period of time. Investors can avoid high risk area simply by researching suburbs and properties well before investing.
It’s easy to get started
Investing in the stock market requires a lot of education as you need to understand the market situation and historical data trend, how the system works, understand the complex world of trading, understand the company background that you intended to invest in including the annual reports, financial data etc which will take up lot’s of your time.
Investing in property, meanwhile, is much simpler: at its most basic, you can simply jump online and start looking at properties. You don’t need specialist knowledge to start investing in property: in fact, many property investors didn’t start off intending to make their fortune through property but instead, they just bought a house to live in and it’s only after seeing the value of their home increase over the time and they start realising how much wealth they can generate, then they proactively investing.
You may also learn various property investment strategies from many of the property forums, websites or even property gurus in the market and you can then start investing immediately once you have done your homework. You may also join a real estate investing club/ community that you are comfortable with and meet other investors and learn what they are buying and how they buy.
Gain More Leverage
Real estate is one of the few investment vehicles where you can use bank’s money to leverage on your funds and purchase larger investments. The ability to make a down payment, leverage your capital, and thus increase your overall return on your investment portfolio is incredible.
Capital Appreciation + Cash Flow
Some investors invest in real estate for capital appreciation, whereas some invest in properties for cash flow. Cash flow is the net income you made from all your rental properties every month after deduct all necessary expenses including maintenance fees. The great thing about cash flow is it increases over time because over the long run, rents will go up with inflation and especially in matured area where there is limited of supply. Eventually over the years, you will pay off your loan and your cash flow will increase significantly.
But some investors do encounter negative cash flow in their property investment portfolio. The problem with negative cash flow is most investors underestimate the money they will have to spend on their rental properties (including maintenance fees/ repair work) and there is no guarantee that when prices will rise. Real estate will probably appreciate over the long run, but it could also go down in value before that happens. You always have to ask yourself “How long can you continue to pay money into a property every month?” You will need to have some spare cash ready in case you are not able to get your unit tenanted out immediately.
It is definitely not a get rich quick scheme and it is not easy to do. For landlords, vacancy and repairs can eat into profits. You always have to take into account your expected monthly mortgage, operating costs, taxes and maintenance, expected rental income to judge whether the anticipated return will be worth the risk and effort involved in owning the property.
Other people to pay for your investment
One of the benefit in rental properties is that you are in fact getting other people (which is your tenants) to subsidise your investment through monthly rental payments, making property one of the most affordable investments around.
Many investors following a capital growth strategy are putting together a nest egg for their retirement, be it:
- Selling the properties over the long run and creating a lump sum gain
- Sell some of the properties and living off rental income
- Living off a line of credit
Yield and value of properties will definitely continue to improve over the long term (10 to 20 years) – making properties worth more each year. Hence, property investors are more likely to hold onto properties when they retire, due to the effort required to accumulate them and they can enjoy the rental income from their properties portfolio as their retirement income.
Creativity and Flexibility
Investing in properties is fun because sometimes you can purchase a property considerably below market price because of your negotiation expertise, knowledge and the contacts of yours. If you are buying a share, you buy it at the market price at that time and there’s no scope for negotiation. Whereas in the property market, it’s exactly the reverse: buying and selling is all about negotiation. You can deal directly with some of the motivated sellers, especially those in debts and you can negotiate a better price from there. You can also use different types of strategies in the market such as lease option, rent to buy etc and to an certain extent, you can also negotiate your own purchase criteria with the seller which gives investors lots of flexibility in structuring a deal.
Real estate investing takes time, flexibility and ambition and passion to make it work well. The sooner you get started, the easier it will be and the better off you will be later in life.