Is real estate a good investment? Clients ask us this frequently, and the answer is yes, but only if you’re able to pick the right types of investments. For instance, real estate investment trusts (REITs) are one of the best options for investors interested in real estate investing
Is real estate a good investment? Many individuals have grown rich through part-time involvement in real estate investing—probably more than have done so through the stock market. However, that’s mainly because of three key factors that are easy to overlook: leverage, sweat equity and higher risk.
It’s easier to get financing for real estate investments than for stocks because real estate tends to be less volatile and easier to appraise, and it generally produces more current income. It also rarely drops drastically overnight, as some stocks do from time to time.
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Is real estate a good investment? Here is some helpful background
Real estate is property you can invest in, whether it’s personal like a home, or for business like an office building or shopping mall.
Eventually, rents can rise to a point where they cover the mortgage, taxes, maintenance and other expenses. By then, you may have a big capital gain. But that can take many years.
Is real estate a good investment? There can be high risks in real estate investing
There are risks associated with real estate investing: real estate is illiquid, expensive to manage and buy or sell, and highly geographically concentrated. In addition, rising crime, unpleasant neighbours and other changes in the neighbourhood of your property can make it hard to find tenants or buyers. So can physical problems, adverse traffic patterns, backed-up sewers and zoning changes that allow undesirable development, or limit what you can do with your property.
Most real estate investing millionaires earned their profits by taking on a lot of risk, worry and work. They also went into it with realistic expectations and the intention of sticking with it for many years.
Many also owe at least part of their real estate investing success to timing: they bought when real estate had been in the doldrums for years. If you buy at or near the end of a boom in prices, you may need to wait for a subsequent boom before you can sell at much of a profit.
6 key real estate investing tips potential investors need to know
Tax pluses. Homeowners get a tax-free, rent-free benefit of having a place to live. Profits on sales of principal residences are also tax-free.
Growth in nearby job and leisure opportunities raises land demand. That pushes up land values. However, land supply can increase too, from rezoning of industrial or agricultural land to residential use, or from cuts in minimum lot sizes.
For maximum investment safety, buy the most common house in your area—a two-story four-bedroom, say, or a three-bedroom bungalow. It’s ordinarily easiest to sell.
For maximum capital gains, buy a small house on a big lot in an improving area. It may sell for little more than land value. Years later, you may be able to demolish the house and divide the land into several building lots.
Another thing to consider is the quality of nearby schools, even if you don’t have children. Properties near good schools tend to have higher values, and attract a wider range of buyers when it’s time to sell.
For maximum enjoyment, buy a home that’s a little bigger and nicer than your family will need in the next, say, 10 years. Chances are you won’t regret it.
Is real estate a good investment? Starting with REITs is a promising first move
Real estate investment trusts (REITs) invest in income-producing real estate such as office buildings and hotels. That’s a segment of the market that is difficult for most investors to access through direct ownership of property. Moreover, real estate investment trusts, REITs, save you the cost, work and risk of owning investment property yourself.
The best real estate investment trusts have good management and balance sheets strong enough to weather an economic downturn. They also have high-quality tenants, and they carefully match their debt obligations with income from their leases. The best ones still do well despite an economic slowdown, and they take advantage of low interest rates to refinance long-term mortgages.
Outside of REITs, if you’re investing in real estate primarily for profit, you should look at multiple-unit rental housing or commercial properties, especially those with big parking lots or extra land. Investments like these can give you current income, plus long-term development possibilities. That’s a potent combination for patient investors. And of course, location is the most crucial part when it comes to real estate investing in Canada and in any country.
Some real estate investing strategies have come under scrutiny, like Airbnb property offerings, which may incorporate illegal sublets or other frowned-upon practices. What controversial real estate investing strategies do you readily avoid
What mistakes do you see investors make with real estate? Do too many people buy in without understanding what it takes to be profitable?
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