What are the investment opportunities of real estate?

Property is known as a reliable investment for many reasons. Firstly, it is an investment usually associated with full control. That means that you make the decisions surrounding the investment. This has its pros and cons of course, but generally, ownership, or even part-ownership of a house leads to more control than owning shares in a company.

Leverage is another reason why real estate can be extremely profitable. Leverage means that you can invest in something bigger than the capital you have initially - through gaining debt. Whilst debt has its owns cautions, leveraging a property means that if you own £50,000 of a £500,000 house, and the house value increases by 10% (£50,000), you have just made a 100% return. This happens a lot for real estate investors, and can happen in a very short space of time.

 

First home:

Owning your first home can be seen as investment as well as somewhere to sleep. Whilst it may be a home first, you can make use of your space by renting out rooms or garage space to earn extra income, as well as benefit from the property value increasing over time.

Renting you cannot change any of the fundamentals to your home. Homeowners instead have the freedom to knock down a wall for a larger living room or build a conservatory, whilst increase the value of the home for example.

Buy-to-let:

Buying a second home can also make use of those capital gains, and may even see greater % gains relative to the market average depending on its characteristics.

Most importantly though is the rental income that you can receive as a landlord. There are changing (usually stricter) laws placed on landlords surrounding tenants in most countries, but the cashflow you can receive from owning multiple homes, such as many-bedroom student homes, can be vast.

Real estate crowdfunding:

Purchasing residential homes has been an increasingly common strategy by those who can afford it. It is more accessible to people now generally, despite mortgage deposits being greater than 2007 levels.

In this sense, the property market can sometimes become saturated and alternative investments may be preferred. Real estate crowdfunding such as Crowdestor is a great option, where you can have part-ownership of homes, and sophisticated investments such as hotels, yet without the administrative duties.

Additionally, these funds are usually run by experience professionals who are experts in property investment, and likely have much more knowledge than yourself. This can lead to a greater return, and with less hassle.

 

Financial independence

Whether it is owning your first home and trying to pay off the mortgage as soon as possible, or owning a second home, these are helpful to achieving financial independence.

Financial independence is a financial plan to become debt free, and be able to live from your accumulated wealth, meaning you can retire early.

Whilst owning your first home will likely lead to taking out a large mortgage debt, usually, it is still in line with the financial independence strategy.

Firstly, this is because it is not a high-interest debt, which are the priority to eradicate and avoid.

Secondly, investment is a big part of financial independence too, not just reducing debts. Property loans are often justified if the returns are worthwhile.

The gains in capital, the avoidance of paying rent, and the payments towards you principle (gaining equity) are the three reasons why this debt can be justified. However, this doesn’t mean that the mortgage should be dragged out - paying it off as soon as possible to reduce interest payments is advised.

 

What is a good vacancy rate?

Vacancy rate is the amount of time that the property is spent unoccupied - which means no rental income!

This can vary widely, perhaps even more so than the yield. The average vacancy rate in the US is 7%. Under 5% is probably what is a target in the US, but of the poorer neighbourhoods may have a vacancy rate much higher.

This vacancy rate should be factored into the estimation of your future income from the property, otherwise you are assuming your home will always be occupied, which never happens.

Pricing the rent of your home as expensive (overpricing) is a big factor in leading to a high vacancy rate, as you will struggle to find tenants.

 

What is a good rental yield?

Rental yield is the amount of rent that is to be received compared to the market price of the property if purchased.

Around 7% and 8% is considered a good rental yield.

It is of course relative to the location, but anything much less than this may not be worth the investment of a second home.

The yield you can expect for your property is basically an indicator of your future cash flow. The yield should therefore be compared to your mortgage repayments, particularly with buy-to-let loans charging high interest. Of course, other factors will damage this yield too, such as maintenance and possibly agency fees.

Real estate has always been a great investment, and it always will be.

Debt is rarely encouraged, but sometimes it takes money to make money. Mortgage debt is also a safe and relatively low interest form of debt.

Investing in a home may not be a liquid investment, but it’s worth it, particularly with two ways to gain from it instead of one: capital growth and income.

Property is an addition to the portfolio - whether you live in it or it is a second home. It can be a great way to diversify away from traditional stock risks, too.

For those who are interested in becoming financially independent and wish to retire early, getting on the property ladder is a big part of this (unless the alternative is tiny home/van life, which has its benefits).

Paying off the mortgage as early as possible will lead to a life much less stress, as the demand to work-to-live decreases. Suddenly, you are finally free to live in a home without payment.

You can take this a step further by making the home sustainable, too.

Solar panels and water collection for example is something you wouldn’t do on a rented property. It doesn’t get much better than creating a future situation with no rent or bills, does it?!