Unsure of whether investing in real estate is a good idea? Read on for the list of benefits of investing in real estate property.
Why should you invest in real estate?
The simple answer: diversification. When you think about growing your wealth, you shouldn't really put all of your eggs in one basket (well, you can, but you'll either score very big or you'll completely implode). It's too much risk. Diversifying will allow you to maximize your returns, while limiting your potential downsides. Unlike investing in the stock market, real estate tends to be a pretty stable asset. The only time we really experienced a housing bubble was the 2008 housing crash, which will more than likely not happen again. Why? What drove the 2008 housing bubble was the fact that people with low credit scores and who had a higher risk of defaulting on loans were getting approved for loans they traditionally should be rejected for. There are stricter rules and regulations in place now to prevent something like the 2008 housing crisis from happening again.
Another big positive is the ability to build equity (which directly grows your wealth). The benefit of building equity is that you are able to leverage it in the future to get another property. This is typically how one person can turn one investment property into several investment properties with just one down payment (more on this at a later date). If you haven't already, read up on Rich Dad, Poor Dad as the author talks a lot about real estate investing in his book (it's also one of my top 3 personal finance books to read).
What options are there for investing in real estate?
There are three main options for investing in real estate.
1. Purchasing an investment property: this is pretty traditional and mirrors how you would purchase a single family home except you're calculating the monthly rent vs monthly expenses to see if the rent covers everything. We have a spreadsheet coming out soon that helps you easily calculate annual ROI of a property! Investment property is really any property that you monetize - that can be a single family home, multi-family home or commercial real estate. This typically also requires the most amount of money as you typically need to put 20% down on a property. Read more about the pros & cons of purchasing investment property.
2. Investing in public real estate investment trust (REITs): purchasing investment property does require a lot of money upfront. REITs are purchased in the stock market and generally require much less cash upfront (down payment vs a few hundred dollars). The benefit with REITs is that you're not just investing in 1 property, you're investing in several (and most likely in different types, like commercial buildings, multi-family, storage facilities, etc). Though you do still invest in the stock market, it is a different type of investment and it does act differently compared to individual stocks, ETFs, etc. This will still provide your portfolio with diversification.
3. Investing through an online crowdfunding platform: A little more non-traditional, but becoming much more popular, online platforms like Cadre are making waves as a new way to invest in real estate with lower fees. You can invest in a variety of projects - you decide which one is right for you after going through their offerings. Investment minimums do start at $25K though, so it is quite steep of a commitment, but may be less than a down payment (depending on the location you're buying in).
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