Why Real Estate Creates 90% of Millionaires
Written By: Mo Elhammady @the_business_lounge_ @moelhammady
Photo from Pixabay
There are many reasons why real estate is a great investment to make. Some might argue that it provides better returns than the stock market, and as a bonus you avoid all the volatility. Other than enjoying excellent rates of returns, great tax advantages, and the fact that you can diversify your portfolio to increase your stability, leading to greater wealth, here are four main reasons why real estate is one of the best investments you can make.
In case you aren’t familiar with the concept, cash that is flowing in every month without you having to work for it is produced by investments, or assets generating cash-flow. When you buy a property with decent judgement, it’s pretty easy to predict the cash-flow and see if it will generate more income than it costs to own. Another term for it is passive income, and it should be your main focus in building massive wealth.
One of the best things about cash-flow is that you don’t need a large amount of money in your savings to reach your financial freedom; and that’s because cash-flow breeds more cash-flow.
If you start for example, by owning a small two-bedroom, one bath house, the monthly cash flow that starts to come in once you begin renting out the place will be your first building block towards the level of cash-flow you wish to achieve. There will come a point in time where the cash-flow from your initial investment won’t only support your living expenses, but also your next investment(s). Your cash-flow will breed new assets, which logically in turn, will breed more cash-flow. That’s a wonderful concept, isn’t it?
Leverage is using borrowed capital to increase potential profits. In simpler terms, it’s using other people’s money to make money for you. It’s one of the most powerful advantages in real estate investing, as it allows you to buy a much larger asset and increase your potential return on investment than you could if you were to pay the full purchase price upfront. Interestingly, it’s somewhat surprising to new investors that the less cash you invest, the higher your leverage and your return, from both property appreciation and rental income.
To ensure that leverage is working for you and not against you, use it wisely and use these following tips:
Tip 1 - Be conservative in your appreciation expectation. It’s safer to build your financial strategy around a slightly lower expectation and then be pleasantly surprised if returns are higher than anticipated.
Tip 2 - Get a payment you can live with. The idea of acquiring a single-family property with little down can be very appealing, but the higher monthly rates can become a problem later on, especially if you have a couple months of unexpected vacancy. Be sure to find the right balance between your down payment and your monthly payment.
Tip 3 - Keep your focus on cash-flow. When you purchase rental properties, their on-going operation is absolutely vital. Can you keep the home occupied and at rent rate that covers your costs? The answers to both of those questions should be “Yes” if you’re expecting a profit.
Real estate prices will always rise in the long term due to the fact that there’s a limited amount available. Everyone wants to own, but not everyone can. Real estate investors and end-users alike are always keen to buy a property that they know will gain in capital appreciation. The greater interest from end-users in recent years to buy rather than rent is because real estate appreciation means that their asset becomes a greater source of security going forward.
Having said that, there are five main factors that increase a property’s value, especially residential ones.
Factor 1 - Demand & Supply
When there’s an increase in demand for homes in a certain area, property prices go up if the amount of residential real estate projects being built in the area to meet the demand is not catching up fast enough. In other words, people buying homes for their own use (end-users) are willing to pay more for a home because living in that area is attractive or desirable.
Factor 2 - Fiscal Inflation
Inflation is caused when there’s an excess of money in circulation, which essentially causes the value of money to reduce. When that happens, the prices for different input items like the cost of land, construction materials, construction labor, and building permits, also increase. Inflation of course won’t result in increased property prices if the area is considered deficient – In other words, it has poor accessibility, or poor social and civic infrastructure. It could also have an oversupply of residential projects already.
Factor 3 - Cost of Borrowing (Interest Rates on Home Loans)
This one is pretty direct. When the cost of borrowing increases, the demand for homes decreases since fewer buyers can afford the higher EMIs, or equated monthly installments. Likewise, when the home loan interest rates are lower, then affordability increases and the market improves, leading to higher demand for residential property purchase.
Factor 4 - Property Market Drivers
When talking in specific about residential real estate, the term “market drivers” refers to any and all developments in a certain area that positively impact the desirability and convenience of living there. These can include but aren’t limited to:
- New office complexes developed in the area.
- Shopping malls or hypermarkets set up there.
- The proximity of educational institutes & hospitals which reduce travel time to important establishments like these.
- Zoning regulations preventing excessive development that could lead to densification. This in turn preserves more open spaces, greenery and the overall ambience of the location.
- Public transport systems ensuring the location is easily accessible by road, rail, or even air.
- Any new infrastructure projects to help boost the overall quality of life in the location, such as flyovers to reduce traffic congestion, water reservoirs, etc.
Factor 5 - Population Growth
Obviously the growth of a population in a certain location will result in increasing demand for housing there. This increase in demand directly translates into faster appreciation in real estate prices.
When compared to other methods of making money, real estate investing is one of the most practical ways of doing it. The reason for that is simply because we as human beings, will always need land. Aside from the three previously mentioned reasons, there are many others that would suggest investing in real estate is a smart and sound decision. For example, diversifying your portfolio by allocating funds to various assets will provide you with more stability in the long run. Also, depending on where you live, there are many tax advantages you can enjoy including tax deferred growth, tax breaks, and tax deductions. Also, real estate is “improvable”. What I mean by that is because it’s a tangible asset, made of wood, brick, concrete, and glass, you can improve the value of any property with a little “sweat equity”. Whether its structural or cosmetic, or you do it yourself or hire someone, improving the overall estate will make it worth more.
I could keep going on and on listing more practical reasons for investing in real estate, but on a personal note, I will say this: It’s not only a safe financial investment, it’s also one that can provide fun, happiness and priceless memories that will last a lifetime.