Everyone seems to know a thing or two about investments. Stock markets are the gold standard for many of us, although there are better investments out there if you are prepared to apply yourself. The global financial crisis served as a wake-up call to investors: few investments are immune to panicked selling activity. As a case in point, the Federal Reserve Bank of Atlanta published a graphic indicating that stock prices plunged 50% from the high to low between October 2007-March 2009. Not exactly the type of investment you’d want going into retirement.
When Lehman Brothers tanked, many other companies followed suit. We’ve seen significantly fewer IPOs pre-and post the financial crisis (213 in 2007, 31 in 2008, and 222 in 2013). But one aspect of the economy which tends to have a devoted follower base is real estate. For starters, it’s a tangible asset that you’re working with. It’s not a fractional percentage of ownership in a listed company which may go belly up. There is something to be said about property values: they may fall precipitously, but the value of the investment will never be zero.
How Important is Real Estate in the Economy?
Analysts confirm that US real estate construction amounted to $1.15 trillion in 2018, or 6.2% of US GDP. That figure is substantial, although it is marginally less than the $1.19 trillion at its zenith in 2006. Back then, real estate accounted for 8.9% of US GDP. Across the pond, the Bank of England put out a report indicating that homeownership in the UK stands at 65%, with 53% having no mortgage and 47% of people mortgaged. 35% of people in the UK rent their properties, with 17% private rentals and 18% social rentals. The average UK home price is £211,000, with average London prices at £472,000, and homes in the north at £127,000. Housing is a significant component of UK GDP too.
Property guru, Ofir Eyal Bar believes that it’s important to have all your ducks lined up before you get into the real estate market. He contests that, ‘…it’s a lot more expensive to put down a 20% deposit on a home and commit to making regular monthly payments for the next 30 years, than it is to buy stocks on the FTSE 100 index, the Dow Jones, the NASDAQ, or the S&P 500. Real estate prices tend to rise over time. Of course, they can fall too as was the case during in global financial crisis. Overall though, it is safe to say that the right property can be a fantastic investment. It has been noted that existing home values have risen by approximately 5.4% per year over time.’
Investment Properties or Homes?
There are very different financial considerations to bear in mind if you are choosing an investment property over a home to live in. For starters, investment properties typically require the minimum down payment of 20%. If the home price is $400,000, that translates into $80,000 at a bare minimum. Plus, there’s no mortgage insurance available on investment properties. Most people don’t have enough money to put down the 20% deposit, so they end up financing the majority of their home purchases.
Once you’ve decided to invest in real estate, it’s important to narrow down your choices. There are many different investment vehicles you can add to your portfolio. These include commercial real estate, apartment buildings, condominiums, villas, residential land, agricultural land, or even rental properties. Each investment option is associated with a specific set of requirements that must be met. In certain cases, the investment property may be subject to homeowners association rules limiting the number of rental contracts you can have per year. You may also find that the rising costs of HOA dues sometimes assume the proportions of a mortgage payment. These are important factors to bear in mind.
Who Will You Rent to and Who Will Manage It?
As a homeowner, you may wish to rent out a room in your home, or the entire home to tenants. If this is your objective, it’s important to carefully screen your tenants for creditworthiness, with criminal background checks too. If you use a realtor to list your property, they typically take a big chunk of the annual rental for themselves, typically the first month’s rental. Costs rise if you opt for property management of your rental, since the property management company will pay regular visits to your property to ensure that everything is in working order, maintenance work is done, and that the tenants are taking care of it. Of course, you can always go solo and cut costs, but then everything falls on you.
Can You Avoid Risk with the Real Estate Market?
All investments have an inherent degree of risk. Real estate is no different. Having said that, there are many factors that can safeguard your real estate investment from collapse, such as location, location, location. Price is not the only determinant of value with real estate. Appreciation and an owner’s perceived value are equally important. A home which serves the purposes of providing safety and security for your family is always worth more than its sticker price. By the same token, an investment property purchased at a premium may still be valuable if it can be rented out at a premium.
Risk mitigation is always possible with real estate purchases. If you don’t want to take on all the risks on your own, partner up with others. Go in with family members, or investors looking for precisely this type of opportunity. Where there is potential for generating revenue, there are always going to be investors. Nobody can anticipate with 100% accuracy what will become of the property market in any area, at any time. There are many examples of once thriving cities which are now considered less than desirable. Take Detroit, Chicago, and Johannesburg as cases in point. Similarly, there are many areas which are now highly desirable.
Do your homework. Check with your town council what amenities are close to the property you are interested in purchasing. What development plans are in the works? A new shopping centre? Schools? Entertainment facilities? Business relocations to the area? Many of these public works projects take years to come to fruition, but the blueprints are available to anyone who is prepared to do a little digging. If you get in early enough, you will reap the rewards of property appreciation.