Property investing usually comes up as an option, which is simply when you buy into real estate properties as a form of investment. Normally property buyers have the option to flip and resell properties for a profit or lease them for a steady income.
Property Investing vs. Other Wealth-Building Strategies
Purchasing properties is typically a long-term commitment. Even flipping houses takes several weeks to months compared to short-term wealth building strategies such as trading. The length of time an asset is held is one of the major differences between property investing and, say, foreign exchange (forex) or stock trading. The price of these assets move very quickly which is why many choose to trade forex and stocks daily to profit off of market fluctuations. Though real estate markets can decline overnight, they generally recover and appreciate over time. This is why Yield Report describes how real estate generally works well with inflation because even with inflation, real estate values generally increase or stay the same. It’s a major advantage for property investors who want to ride out the highs and lows of the economy.
Liquidity is another major difference and real estate is not a liquid asset compared to others. FXCM’s guide to forex explains that as the most liquid market in the world, traders are able to use lots of leverage. This gives them a bigger market exposure than their trading capital allows which can magnify returns. In real estate, you can use leverage in the form of a mortgage and other loans. The difference, though, is that you can purchase other assets for a few hundred dollars. But when buying a property, you need at least several thousands worth in starting capital.
Pros and Cons of Property Investing
Understanding the benefits and risks of property investing is a must before deciding if it’s actually for you. As mentioned, real estate generally works well with inflation. Buying an apartment now for a certain price doesn’t mean you have to keep renting it at a fixed price. As prices of goods go up over time, so do rent prices. This steadily rising income can help you capitalise on steadily rising prices. Speaking of rent, you can also get your investment capital back and earn income by leasing out your properties. This can help you maintain a strong cash flow on top of your other profit streams.
However, owning property doesn’t guarantee immunity to economic downturns. Leasing stability still highly depends on what type of property you own, its location, and the demographic it’s geared towards. For example, a report by the Reserve Bank of Australia on the rental market states that ‘young, inner-suburban workers, international students and new migrants’ have been financially affected by COVID-19. This has led to price adjustments given the higher supply and lower demand. You can recession-proof your property investment portfolio by selling the ‘duds’. Consider which among your properties continues to make money even in an economic downturn. Take into consideration their equity, quality, and taxation.
While real estate is a tangible investment with steady returns, the costs of purchasing a property can be very high to begin with. As mentioned, you need thousands of dollars to cover a down payment and possibly thousands more in transaction costs. As time goes on, you would have to shoulder on-going costs that include property management, marketing fees to find tenants, inspections and repairs, which can overall be a huge financial burden for some investors down the line.
Is it Right for Me?
Property investing, as with any type of investing, is not for everyone. If you have enough capital to invest, however, you can generate returns by owning and leasing one or several properties. Historically, real estate has also shown a lot of promise in guarding against inflation and even capitalising on it by increasing rent prices. The bottom-line is that property investing is a long-term commitment with good, steady, and passive returns. If you’re ready to embark on this wealth-building strategy, check out our blog on ‘Your Complete Guide to Property Investment Finance’, or learn more about investment property loans.
Written by: Jerie Bahamas
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