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| Real Estate Investing - An Alternative To Traditional Stock Market Investment |
From a historical perspective, investing in real estate is
almost as old as the construction of property itself. Indeed
many business owners who created their wealth through companies
then went on to diversify into real estate investments. In fact,
over the years real estate investments have produced similar
returns to those found in the stock market. Let's take a look at
some of the reasons:
First of all, and most obviously, the supply of building land
around the world is limited, even when taking into account
landfill opportunities. Since the world's population is growing
and the demand for housing ever increasing, then there would
seem to be a never-ending and increasing requirement for real
estate of all types.
Now let's take a look at the mechanics of buying property. Here
it can be seen that investing in real estate is quite different
from most other traditional investments such as stocks. With
real estate you can often borrow up to around 80 percent of the
value of a property, sometimes even the full value and beyond
under special circumstances. Thus a more modest investment of
say 20 percent of the value can be used to buy and control the
full value of the larger investment. Naturally, if the value of
your investment increases, I.e. property prices rise, then the
value of your real estate investment also increases. If so, then
you are |
into profit, including that on the money you originally
borrowed.
Naturally, there will be costs associated with real estate
investing (such as legal fees and property maintenance, taxes,
etc), but these are usually small in comparison with the
potential gains.
Borrowing in order to invest in real estate makes real estate a
type of leveraged investment. But if you know anything about
leverage, you will realize that leveraged investments can also
go against you. What, for example, if the property you purchased
for $300,000 decreased in value to $240,000? Even though the
value only dropped by 20 percent, you actually lose 100 percent
of the original $60,000 investment. And if you have a mortgage
on this property making up its full purchase price, you will
actually need to pay money to the mortgage provider in order to
cover the costs of selling the property. That's in addition to
the loss of the whole of your initial investment.
So, as you see, investing in real estate is something to be
taken very seriously and should not be done with money which you
might need for other things in the near future. Investment in
property is more secure as a long-term investment. In the above
example, if you could have held onto the property and not sold
it, the loss would purely have been 'on paper'. In all
likelihood, over time the value of the property, |
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unless grossly
overpriced when you originally bought it, will rise and you will
likely not only recover the full value of the initial
investment, but also possibly make a nice profit when you do
come to sell.
Another reason that real estate is a popular investment is that
there are profits to be made from it whilst you are the owner.
In addition to the tax-saving benefits (in that any tax due on
the property's increase in value doesn't become due until it is
eventually sold), you can also make additional money from
renting out the property. This can often cover all your running
costs of the property, plus providing a profit on top.
Unless you make a large down payment, early on during your
ownership the monthly operating profit from your property
business is likely to be small or non-existent. But over time
this profit will increase as the amount of rent you can charge
increases at a higher rate than the running costs. Naturally
these profits will be subject to normal income tax rules.
A further benefit of investing in property is that you might be
able to purchase cheaply a run-down or 'distressed' property and
fix it up or develop it further. Properties like this can still
be found if you look around carefully. Naturally, investing in
this type of real estate can still produce large gains. This is
something you certainly can't do with |
traditional stock market
investments.
However, returning to the initial question about whether real
estate investing is still a viable option when current prices
seem to be nearing their peak: yes, it can still be so, but you
might need to be more creative and prepare to be in for the long
haul. Property 'flipping' methods that worked extremely
successfully yesterday, might not work at all well tomorrow.
You might also consider diversifying into overseas real estate
markets. Whilst this will require greater study and analysis,
and there are many more legal issues to consider, seeking out
what appear to be undervalued international real estate
opportunities has the potential to be highly profitable if
handled correctly.
Naturally, you should always seek the advice of professionals,
both financial and legal, before investing in properties of any
description, particularly when considering investing overseas.
There might be major implications to your overall taxation.
Risks can also be substantially higher when you are not there to
oversee your investment in person.
About the author:
You can learn more about real estate investing and Bianca Tavares' guide to Florida
property at Florida
Real Estate.
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