Investments are the key to financial security in the future. Without investments, you will struggle to grow your wealth. The chances are you aren’t going to spend your paycheck every single month, so what will you do with the money that’s leftover? This is where investing comes into play, giving you a chance to spend that money and gain something in return.
There are plenty of investment opportunities and ideas out there – some people live and die by the stock market, others invest in Forex, while some have taken to cryptocurrency. However, there’s one investment that always seems to generate a lot of interest and be the most coveted of them all: real estate.
For reference, real estate investments relate to anything from property to land. This can include the following:
- Mobile homes
- Static caravans
- Retail stores
Whether you’re opting for residential, commercial, or industrial real estate investments, there’s money to be made here. As such, one question that always crops up is whether or not investing in real estate is good for your finances.
Overall, when done correctly, property investments can certainly be beneficial for your financial future. The keyword there is ‘correctly’ – many people get things wrong when investing in real estate, and there are risks. Understanding the risks involved is essential to know what mistakes to avoid making. When you do this, you will reap the rewards of the benefits of real estate investments.
What are the financial risks involved in real estate investing?
Firstly, you have to recognize that investing in real estate will be a colossal investment. We’re talking hundreds of thousands of dollars in a lot of cases, which is a huge chunk of money. As a result, most investors need to get mortgages, so you have the financial responsibility of paying back a big loan. Raising the funds for a downpayment on a property is also pretty risky – you’re still departing with a lot of money in one go. When you factor this in with the regular mortgage payments, you can see how buying property can be somewhat risky. This is why it’s important to understand your finances and budget accordingly to handle a mortgage without any issues.
Moreover, there are a few other risks to know about:
Selecting a bad location
The location of a property means a huge deal for investors. A lot of new real estate investors make a grave error in buying property in a bad location. Essentially, the location isn’t a desirable place for people to live or vacate to. Therefore, it will be hard for you to sell the house for a profit – or to rent it to anyone. Why do people make this mistake? It’s usually because they notice a house for a very cheap price, striking immediately to secure what they think is a bargain. Realistically, the house is cheap because it is in a poor location. Some investors can lose money simply by making this mistake.
There is an element of unpredictability in the real estate market. For instance, you never know when a recession will hit. If there’s an economic downturn, you will see a reduction in your property value. While things can and should turn around with time, it is demoralizing and might scare you into selling for a loss to minimize your losses.
What’s more, you might end up in a period where it’s impossible to find tenants. During difficult economic times, a lot of people might move back in with their parents as they can’t afford the rent. This leaves landlords with empty properties that are leaking money.
Finally, there’s an unpredictable nature of the structure of a property. It may look good when you buy it, but you could run into costly hidden problems a few weeks or months down the line, which require extra investment to fix.
What are the financial benefits of real estate investments?
While the points above might make you think that these investments aren’t good for your finances, they can easily be dealt with if you do your research. Structural problems can be found if you get surveyors to run a detailed survey of the property, checking for everything. You can also avoid buying properties in poor locations by doing research into the best and worst places to invest in real estate.
As a consequence, you can make wise investments that present the following benefits:
A gradual appreciation
If you look at any real estate websites, you’ll see that property prices have gradually increased over the years. One of the great things about these investments is that they present you with a fantastic long-term option. Over a 20 or 30-year period, your property will increase in value – that’s just a fact. So, it’s a good investment to have in the background while you work, cashing in and selling the place when you retire.
Less volatile than other investments
While the market can go through down periods, it is far less volatile than other investment approaches. For instance, in the stock market, you can literally lose all of your money if a company goes bust. With real estate, you are never going to lose 100% of your investment, and if you play the long game any dips will soon turn around.
Dual ways of making money
Paying off a mortgage can be a big financial commitment, but real estate investments offer a way to cope with this. By renting out your property, you can use people’s rental payments to help cover the monthly mortgage costs. This helps you pay it off quicker, and it’s also a second way of making money from the investment. A wise move is to rent your property, then sell it when you’re retiring or want a large sum of money in one go.
After considering everything, real estate investments are good for your finances – but only when you manage the risks accordingly! Take your time to research things and learn the market, only investing if you can financially afford to do so.