There are many reasons why real estate investments are better compared to other forms of investments. Shelling out money for real estate could be better than investing in stocks and is definitely better than simply keeping money in the bank. Of course, it’s not a perfect investment but in general it comes with more advantages than disadvantages.
The following are the top 6 reasons why you should consider a real estate investment.
Value Appreciation and Cash Inflow
This is one of the best reasons why you should consider a real estate investment. Land, in particular, very rarely loses its value. Instead, it keeps appreciating over time. You may not do anything about the land you bought and wait for the area to progress and you can expect the land’s value to considerably increase as the years pass. Even better, you can use the property to make money. You can erect a building and have it leased. If you don’t have the capital, you can engage in an agreement with a contractor for a profit sharing scheme.
If you have a residential property, you can also have it leased in full or you can have it converted into a coworking space for the freelancers in your area, if the property is located in the city. You may also rebuild the property into a function room or an events place. It can also be leased out to become a retail store. There are many different ways to make money out of real estate.
Multiplying Asset Value
A real estate investment can be used to obtain cash. You can use it as a collateral to obtain cash for acquiring other assets. This is particularly useful in instances when you find assets that are sold at a price considerably lower than their worth. You will be basically using your asset to obtain another asset without losing an asset. Yes, you will incur a liability in the process but you will have not missed on an opportunity that should not be skipped. You will also be increasing your asset value. Likewise, your equity increases year after year as you pay down the liability incurred.
Multiplying Cash Flow through Low-Cost Debt on the Real Estate Asset
Real estate properties can be used for “positive leverage” wherein increased positive cash flow (inflow) is achieved from operations by borrowing money at a lower cost compared to how much the property is earning. For example, if you have a ₱1,000,000 property that earns ₱100,000 (net, income less expenses) per year or an annual return of 10%, you can use the property as collateral for a ₱700,000 loan at 7% interest. Since you only obtained a loan, you still own the property so the ₱100,000 from it will still be yours but you have cash of ₱700,000 (not accounting for the loan charges and deductions) that can be used for other income generating ventures. Moreover, since the loan only costs 6% but your property earns 10%, you get a 3% return on the money you loaned.
Investments in real estate, based on historical records, have shown to have the highest correlation to inflation in comparison to other asset classes such as corporate bonds and treasury notes. In general, the prices of real estate, especially those operated as multi-tenant assets with high labor and replacement cost ratio, tend to increase with inflation. This increase serves as a reliable hedge against inflation.
Real Value without Red-and-Green-Day Income Generation
Compared to stocks, real estate investments don’t have stop and go times. Their earning potentials are somewhat consistent and generally predictable. Also, they have easily perceivable values. The land on which a structure is built has a value that keeps growing. The structure itself also has a value even though it depreciates over time. The earning potential of the real estate asset also bear meaning to future investors. A real property carries real values that are immediately apparent to businessmen.
The idea that you own real properties can also be considered an advantage, even though this is completely arbitrary. There’s that sense of pride in ownership. There will also be cases when you can use properties as a form of influence. You can influence other businesses that could be leasing your property. They can be used to play business politics. This is not something worth encouraging but it’s reality of life that you may have to make use of everything under your disposal to get something done.
Again, real estate investments are not the perfect investment. They don’t always create advantages for everyone. However, they are associated with fewer drawbacks and they bring solid advantages that can’t be easily disregarded.