Why Invest in Real Estate?
Most of the 1990s, there was earning yields of 5-6% as posted by the Standard and Poors Index.
The dividend yields of the S&P were less than 2%. Since the dividend paying stocks were much less volatile, the gains on the appreciation side would not be an important factor.
If the bond yields are taken into consideration, it showed only around 5% returns. However, better yields were riskier and quite naturally lower yielding bonds were less risky.
During the same period, the real estate investors were in a much better health as they were getting more returns. The reasons are that they had multiple factors working in their favour.
The rental yield was something that is calculated either as gross or as net. The investors who are experienced would prefer to calculate the Net Rental Yield as it takes the expenses, taxes and other costs into account. They also calculate the dividends by the property value or costs. It could also be a negative cash flow and it does not take into account the mortgage payments. Due to this reason, many investors don’t like to look at cash-on-cash rental yields.
The best part of real estate investment is the value of the property increases with the market inflation. It gets appreciated. Increased value refers to a high yield and supplies the investor with an equity line of credit for the use of some other investments.
Apart from that, the inflation is rent friendly as the rental value of a property increases with the increase of the property value by inflation. Quite inevitably this increases the cash flow which is generated by more rent cash flow in without any increase in any expenses for holding the asset. However, the effect of inflation can also fall on the demand for rentals as the affordability is affected by the inflation itself.
If someone uses the leverage at the time of buying the property it can yield greater returns. But at the same time, all leverages have high risk factors involved in them. Higher the leverage, greater the risk.
Amortisation or what commonly we call it, paying out the loan helps in freeing up more investment resources and increases leverage. Some experienced investors pay higher equity in one property to free up funds for some other investments.
Some investors even put their money in some properties with fewer features which are available for a lower price. They rejuvenate the features into it to increase the face value of the property. They make some improvements and amenities or conditions that would exceed the cost resulting in an immediate increase in equity.
While stocks are more volatile and market sensitive and have more factors influencing them, the real estate investments are more investor friendly and give multi-faceted returns.
Advantages of Investing in Real Estate
When you invest in the stock certificates of a company, you look forward to an increase in the price of stocks. Also, you want an income from the dividends if it is given by the company. When you invest in bonds, you look forward to generating money from the dividend rate on the bonds.
However, if you have a real estate investment there are many ways in which you can make profits on your investment. Also, there are different ways of investing in real estate like making passive investments or buying homes and then giving them on rent. The passive investors would like to put the returns obtained from the investments into the stock market as equities of the key home builders.
Here are some of the ways in which you can ensure maximum returns on your real estate investment.
- If you have selected a property well and also managed it properly, then you can get rental payments regularly. The people who rent property continue to get a fixed amount on a regular basis irrespective of whether there is any slump in the real estate prices. This is the major benefit of investing in real estate and you can pay your mortgage with these installments or use them for further investments.
- Real estate investment is generally considered as the best investment because the prices of property continue to increase over a period of time. However, this is not always true.
- You can make changes in your property for the better if you are planning to sell it off. If you have managed it properly then you get a good amount as the value of your property increases. With the passage of time, the styles continue to change and therefore you can keep upgrading your property in order to ensure maximum returns. Also, it would be beneficial in retaining its actual worth.
- Another important factor is that with the rise in inflation the rents also shoot up. Therefore, you can increase the rents as per the increase in the building costs and continue to get good returns from your property.
- As you pay the regular installments of your house, the rise in equity can be utilized for other things. You can also take out equity loans and use the returns for further investments or for some other purpose.
- In order to increase your total worth you can buy below market. You can look out for opportunities and have the experience to see that the property that you are buying now will give you profits in the long run. There are many such opportunities that the real estate investors get from time to time. The right choice makes all the difference here.
The real estate investors have so many income streams unlike investors. For those who know how to invest and also the downsides of the business real estate, investment ensures good returns. Therefore, you should find creative ways of making investments in real estate.