Investing in real estate has grown to become one of the most popular investment avenues for people to park their surplus funds.
Real estate is the big daddy of Investments and even predates the modern stock markets. Real estate is part of the five basic asset classes that all investors must definitely consider exploring.
Additional Reading: A Brief Guide To Investing In Real Estate
Here, we will sketch out a beginner’s guide to real estate investing.
Let us start at the very beginning: with the basics.
Introduction to real estate investing
Real estate investing can be explained as a dynamic investment category that involves operating, investing and financial activities focused around making money from property. There are several types of real estate investments that investors can consider, which we will outline for you over the course of this article.
Making investments in real estate to generate rental income
In the simplest of words, the primary focus of making real estate investments is for the investor (or landlord) to accumulate rental income from a property that he allows someone else to use, as per certain agreed terms and conditions, for a specific duration.
The person who is allowed to utilise the property is the tenant. The payment made by the tenant for such use, to the landlord, is called rent.
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What to remember when getting rental income
It is common for many real estate investors to become misguided in the handling of their real estate investments. Here are some points to keep in mind when earning rental income.
You must remember that, if you are able to fix an appropriate rental rate on your property, you should ideally be able to enjoy a decent rate of return on your capital after taking into consideration property tax, income tax, maintenance and other associated expenses.
You must estimate the amount of time you will realistically be able to manage the investment on your own. Consider turning your actively managed real estate investment into a passive investment to allow for income generation with minimum personal involvement on your part.
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Real estate investments vs investments in stocks
Although the question, “Which is a better investment option between real estate and stocks?” is rather difficult to answer—primarily because it all depends on the type of investor you are, your financial preferences and risk appetite—we can weigh the odds for you.
Let’s begin. First, we need to understand each type of investment.
Investing in real estate is a long-term commitment. With real estate investments, you are procuring physical land or property.
A few types of real estate will have various costs that the property will incur on a regular basis. These costs include taxes and maintenance.
A few other real estate investment categories generate a source of income for the investor. Think apartment buildings and rented houses.
Advantages of investing in real estate
Let us examine the various advantages and disadvantages of investing in real estate.
- Real estate often tends to be a more comfortable investment choice among the middle class. This is a result of their exposure to this idea from a young age. They will have probably understood the importance of “owning” a home and the security and independence it affords them.
- Real estate is essentially a tangible investment. For many people, the fact that they can be sure of the existence of their investment is hugely comforting on a psychological level.
- Being misled and cheated when entering into real estate investments is comparatively more difficult when compared to investing in stocks. In the case of stocks, you will be required to entrust the investment to unknown auditors and managers.
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Disadvantages of making investments in real estate
Here are a few disadvantages of investing in real estate.
- In comparison to making investments in stocks, investing in the real estate sector involves a lot of hands-on work. There are a lot of maintenance ‘responsibilities’ attached to real estate investments.
- If you own an unoccupied property, this can be a strain on your monthly finances and budgeting. Irrespective of whether the property is occupied or unoccupied, the owner of the property still has to pay property taxes, incur maintenance costs, pay for Insurance and other related expenses.
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Buying shares in a certain stock means you are buying a part of a company. Whatever the company does to generate income will also entitle you to a certain percentage of the profits, as a result of holding stocks in said company. This is paid out to investors in the form of dividends.
Additional Reading: First Steps To Investing In The Stock Market
Advantages of investing in stocks
Now we will analyse the advantages of investing in stocks.
- Despite the inherent uncertainties and market volatility that defines investments in stocks, these investment instruments are still highly popular among investors. Buying stocks, reinvesting the dividends earned and remaining invested for an extended period of time has been, by far, the greatest wealth creator in the world of finance.
- Buying stocks is like passive ownership of a business or a company. Owning shares in a business venture does not require any work on the investor’s part (other than the research that is required to assess whether the company is a suitable choice for you to buy shares in). You can sit back and rake in the benefits from the company’s annual performance results.
- High quality stocks are doubly rewarding. This is because these stocks not only increase their profits every year, but they also increase their cash dividends. This means investors will get fatter pay outs as a company’s earnings grow.
- Diversification of your investment portfolio is much easier when you make investments in stocks rather than in real estate. You can continuously increase the number of stocks you own in your investment portfolio for a very reasonable sum of money. Real estate diversification, however, requires much larger financial reserves.
- Investments in stocks are far more liquid when compared to investments in real estate. The sale of stocks can be done in a matter of hours or even minutes, while selling real estate takes months, sometimes even years.
Disadvantages of investing in stocks
Here are a few disadvantages of investing in stocks.
- Although investments in stocks have been known to create more wealth for investors over the long-term, many investors are too fearful of major fluctuations in the markets to wait out the proverbial storm. For instance, during the credit crunch of 2007-2009, many financial advisors were advising investors to sell their stock holdings after the markets had sunk by 50%, when they should have ideally been buying.
- Investments in stocks involve a high degree of fluctuation in the stock prices over the short-term. However, this must not be of concern to the investor because it will be adjusted over the long-term.
Now for all of you who are still unconvinced, and think real estate is still more promising as an investment avenue, let’s tell you more on that front.
Real estate investing through real estate investment trusts
We can tell you about one way to invest in real estate that is similar to investing in stocks. This method involves buying real estate investment trusts (REITs) through a brokerage account.
But wait! There’s one drawback of investing in real estate investment trusts. The dividends paid out to investors from these trusts are not qualified dividends. This means that investors cannot benefit from low taxes usually offered on dividends. These dividends from real estate investment trusts are taxable according to an investor’s applicable tax bracket.
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Types of real estate investments
Investors who are interested in investing in real estate can make several types of investments in this dynamic sector such as:
- Residential real estate
- Commercial real estate
- Industrial real estate
- Retail real estate
- Mixed-use real estate
Investing in real estate through home ownership
Everyone dreams of buying a home. In fact, a home purchase is probably among the biggest financial decisions an individual will make. It is most definitely a long-term commitment.
In the long-term, as you near retirement, the very thought of owning your own home without any debt liabilities attached, can be most comforting. It is surely one of the most rewarding investments a person can make.
Investing in a home has several benefits. You could gain secondary income from rent received or even save money by not paying rent. Ever! Suffice to say, the overall savings are rather sizable.
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Saving up to buy a home?
If you are going to begin, or are already in the process of saving up for your own home, that’s wonderful!
But, here’s a word of caution. Don’t be lured by the promise of exponential returns from investments in the stock markets when you are looking to build a corpus for that home investment.
Investing the money in the stock market, apart from the aspect of volatility, will not allow you to access the funds if you require them in the next 5-7 years.
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The final word
Real estate investments don’t show profits overnight. Investing in real estate is largely dependent on a long-term commitment as well as the patience to wait for returns.
Play it by ‘year’. Literally.
Additional Reading: Should I Buy A House Or Continue To Rent?
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