Real estate is a vital part of many investors' portfolios. It offers an additional layer of security, can generate passive income, and is a good way for investors to build wealth for future generations. Take a deeper look at these reasons and several others below.
1. Additional Security
Investments such as stocks can crash quickly. Real estate is more stable.
2. Passive Income
Real estate enables investors to earn money as a side job through renting out properties. There's no need to quit your day job. That said, being a landlord can be time-consuming, but property management companies are there to help.
3. Wealth for Future Generations
A house is a great legacy to leave for future generations. A real estate investment initially can be about the property itself, its income potential, and the stability it offers for weathering topsy-turvy markets. In terms of estate planning, though, it could become a different type of investment, one you make to secure the futures of your heirs.
4. Expanding Returns
As the equity grows in your real estate investment, you can do an FHA refinance of your loan. Then, you could use some of the cash from refinancing as a down payment on another piece of real estate.
Many ways exist to invest in real estate. For example, one strategy is to buy a duplex or triplex, live in one unit, and rent the other units out to pay for the entire mortgage. With this approach, your family has somewhere to live, the rent you charge covers your mortgage expenses, and you're actively near your renters. Other ways to invest include flipping, vacation home rentals, and commercial real estate.
6. Small Chunk of Money Upfront for Large Potential Returns
To invest in real estate, you typically need a down payment equal to a few percentage points of the house's sale price. That's it. Now, if you were investing in stocks and wanted to buy $500,000 worth, you would have to spend $500,000 (unless you have a margin account, which many people do not).
Now, say you want a $500,000 house. Do you have to spend the purchase price upfront? Absolutely not. A 20 percent down payment equals $100,000. A five percent down payment comes out to $25,000.
7. Increased Valuations
In general, property valuations go up over time. Any type of investing carries risk, but real estate is fairly safe if you want something that appreciates greatly over the years. Boost the odds of that happening by investing in property with a good value, location, projected cash flow, and amenities. Above all, you could look for a low-priced property in need of minor cosmetic work and small renovations, and get that work done for a good price. Then, you could charge fair-market rents.
Rent valuations tend to increase over time, too. Ideally, they outstrip inflation as well as cost-of-living increases so you continue making extra money.
8. Hands-On If You Want
For the most part, investments are "faceless." You access them through screens, and sometimes, banks and businesses. Real estate can be incredibly hands-on if that is what you want. Take sweat equity when flipping houses, or sweat equity when you renovate a triplex to live in and rent out. It can be nice to get up close and personal with one of your investments.
In sum, many investors include real estate in their portfolios because of its diversification, versatility, and increased valuation over time. As touched on above, you don't always need a lot of money to get started, either. You could end up spending a lot less than you would for stocks.