To some, property investment, especially the kind where you buy and resell property after renovating it, can seem like a lot of effort and risk for potentially not such a great reward. However, there are many advantages to investing in real estate compared to other asset classes, which we’ll go over, as well as give you a comprehensive guide to getting started with investing in property.
Intro to Investing
Before we delve into real estate investment specifically, we should define investment as a practice, as well as briefly discuss the advantages and disadvantages of each class of investment. In short, there are arguably four main categories of investment classes. These are equities, stocks, cash or equivalent, and real estate. Each class of asset has its advantages and disadvantages. For instance, stocks are quite risky to invest in, but they are more flexible and offer more variety, and it is possible to make a lot of money very quickly by investing in stocks.
There are other classes of assets, which are smaller and perhaps more experimental. This can include buying collectibles or artifacts to sell as a form of investing or cryptocurrency, which is becoming more and more common as cryptocurrencies continue to grow. Buying gold is also another form of investing, which is often recommended as a type of insurance, as its value is nearly universal and unlikely to plummet overnight as a stock’s value could.
People often recommend or advocate for real estate investment as a safer alternative to investment in these other classes. This is because the real estate market is usually considerably more stable than the stock market, for example. When it comes to real estate in general, transactions are much fewer than they are in other markets, and this means the market is more stable and trends are easier to predict. While this doesn’t mean that investing in real estate is devoid of risk, it does make it much safer, if you have the necessary capital to get started.
A key element of investment is risk tolerance and understanding yourself as an investor. Everybody has different financial goals and a different level of risk that they are willing to tolerate to make a profit. If you are particularly risk-averse, then you might not want to buy a rental property at all, as it can be quite a substantial investment in terms of capital and requires quite a lot of work to be profitable. If this is the case for you, then you might prefer another form of investment in real estate, which requires less direct engagement on your part.
If you are unsure of your aims before you begin investing in general, then it’s often wise to think about what position you are in financially now and where you would like to be in five years, for example. For example, if you would simply like to supplement your income passively and don’t intend to spend substantial amounts of money to get an even greater return, then investing in property by purchasing and selling or letting properties out may be a little more intensive of a process than you would ideally like to get involved in. If this is the case, then there are other ways you can invest in real estate, which we cover later on in this article.
We also recommend that you have, at a bare minimum, a few months’ expenses in savings before you begin looking to use your income for other purposes. This is so that you are in a position to support yourself if you are suddenly unable to work or require emergency funds unexpectedly. There’s not too much use in having a supplement to your income if you don’t have emergency savings, so if you don’t, then we recommend you focus on that before turning your attention elsewhere.
How Does Property Investment Work?
There is no one way to invest in property, but property investment generally involves buying a property in order to sell it later at a higher price or putting money into the renovation of a property with the intent of making a profit. Many people also buy buildings and rent them out as a form of property investment. Whether this is done as a form of passively generating income to supplement one’s career or becomes a job in and of itself depends on the person and how successful they are, as well as how much time and attention their investment properties require. Generally speaking, investment is something that people do on the side of their job instead of as its own job.
Property investment can be quite a diverse practice, especially if the prospective investor has a good understanding of trends and what people are looking for in a property. This is especially true if you are looking to invest in a large market, like a big city. With that being said, it’s certainly not necessary to have access to such a market in order to be a successful property investor. It’s not at all uncommon for someone to start out in property investing simply through owning a unit of apartments, for example, and subsequently end up branching out further afield.
As previously mentioned, one reasonably typical form of investing in property is buying a property with the intention of renting it out to tenants. This can be a housing unit, for example, or a single house. If you are interested in investing in property, purchasing properties to let is a relatively stable and safe option, though this is, of course, not guaranteed. It’s generally expected that house prices are going to continue to increase, which means that, if you choose to sell the property down the road, you should see a return on your investment, as well as any money you have made through letting it out too.
A key element of such investments is organizing your rent or tenancy agreement with tenants in such a way that they both pay off the mortgage on the property if there is one, as well as provide you with some supplemental income. In some instances, you should also be able to try to find a mortgage that is explicitly intended for properties that are purchased in order to be let out. This means your repayment rate should be lower, and you can, therefore, have a wider margin of returns in relation to how much rent your tenants pay.
There are potential risks to investing in property in this way, of course. When you buy a property, there is no guarantee that it is going to be rented out. Most of such risks can be mitigated through research and a thorough understanding of trends and interest in particular areas and types of rental properties. However, it is often more profitable to purchase and let out a property in an area that is not trendy or especially desirable, as properties in these areas tend to be much more expensive.
With that being said, it is, of course, riskier to purchase properties in areas that are not necessarily popular or desirable, as there is less demand in such areas for accommodation. This is something that you need to weigh up as a property investor and try to strike a balance between purchasing in an area that has sufficient demand, without it being prohibitively expensive for you to invest in that particular area. If you’re unsure of where you should be looking for properties, you can engage the services of an advisor in this area, but they won’t be able to guarantee the success of your investment/s.
Another thing to keep in mind is that, as the owner of the property you have bought, you are responsible for the upkeep and maintenance of it. Either you or someone representing you need to be accessible in case something in the building breaks or is otherwise compromised in order to arrange for repairs, etc. Strictly speaking, unless your rental agreement is structured in such a way that your tenant has to pay for anything they break, it’s going to be your responsibility, and it can be costly to replace or fix broken appliances and pay for the upkeep of properties.
Something that many people do not account for when they think about property investment is the potential cost of actually finding tenants in the first place. If you struggle to find tenants, you might need to pay for advertising, and this can be quite costly in and of itself. Alternatively, you can think about engaging the services of an agency that can manage the property for you and find tenants, but this can be quite costly and minimize your profits.
Other Property Investment Methods
Maybe you don’t feel that purchasing and renting or selling properties would be right for you for some reason. Fortunately, there are other ways you can invest in property without spending as much time or money on the venture if you would prefer not to do so. For example, there are property investment funds. To invest in a fund, you simply allocate your funds to a manager, who generally collects funds from a number of investors. The manager then goes on to invest the money in property or shares in properties.
Your returns in this instance are not going to be as dramatic as they could if you bought and let out or sold a property yourself, but it’s also much more straightforward and passive. Therefore, it might be much better suited to you if you just want to supplement your income instead of spending substantial amounts of time and money working on properties and finding people to purchase or rent them from you.
The Importance of Location
Something that is especially important with any type of property investment is that you keep in mind the location of the property. This can be fundamental to the success of your investment; you may find a property that is very desirable, but if there is simply no demand for the area it is within, then you are unlikely to be able to make a return on that property in any way. Cities, in general, offer more diverse opportunities for investment, as well as a more significant potential for returns.
One city we would recommend at the time of writing for real estate investments is Orlando, Florida. House prices are quite low in the city, yet many residents are consistently choosing to rent, which makes it an especially good market for investing in rental properties. The city is quite desirable in general as a place to live, and demand seems unlikely to slow at any time in the near future. On top of this, there are low property taxes and no state income tax. Combined with the warm weather and a high standard of healthcare in the region, this makes Florida quite desirable as a place to retire for baby boomers. As such, we can especially recommend investing in properties that appeal to such a market.
Another city we can recommend at this time is Huntsville, Alabama. It’s the fourth-biggest city in the state and is renowned for its history, as well as being both affordable and experiencing fast economic growth. The population is also growing quickly in the city, and approximately 38% are renters. Because of the types of employment available in the city, a larger than average portion of residents work in STEM, which generally affords them higher salaries than in many other industries. Combine this with the affordability of the city in many respects, and this makes it a great potential market for those interested in investing in real estate, particularly in the university district/s.
Finally, Dallas, Texas, seems to be an especially appealing city to real estate investors at the time of writing. This is due in part to the facts that several major employers in San Francisco and Los Angeles are relocating large parts of their staff to Dallas and the city is somewhat more affordable than other major commercial hubs in the USA. The population is growing rapidly, but homes in Dallas are quite affordable. As such, this is an especially good time to consider investing in property in Dallas, as it is experiencing rapid growth of relatively highly skilled and prosperous workers who are looking for property to buy or rent.
Property investment can be a great and stable way to supplement your income or diversify your portfolio. It is a multifarious and generally low-risk form of investment, especially with the right type of preparation and research. There are several different ways to invest in real estate, and with some consideration, most investors are going to be able to find some way of investing in real estate that suits them and their financial goals, both in the short and long term. Above, we’ve offered some specific recommendations to potential investors, both in terms of the kinds of real estate investment they can consider and cities to think about investing in in the near future.