Is now a good time to invest in Real Estate?

There are many investing strategies that can be used in real estate.  When it comes to investing in real estate, the first thing that most people think about is their home. However, there are other options for investors.  Over the past few decades, real estate has become an increasingly popular investment vehicle.  Although it’s an individual asset, real estate should be part of a diversified portfolio.  One of the best ways for investors to make money from real estate is by becoming a landlord.

Historical Real Estate Prices

Despite the various factors that have affected the real estate market over the past few decades, it’s still considered a safe investment. Before the Great Recession started, historical data indicated that home prices would continue to rise. However, during the spring of 2020, home prices started to fall due to the COVID-19 pandemic.

The Great Recession directly correlated with the real estate market’s decline prior to the COVID–19 outbreak.

Rentals

If you’re planning on investing in rental properties, it’s important to consider becoming a landlord. This type of role comes with various responsibilities, such as paying the mortgage, maintaining the property, and finding tenants.

Unlike other types of investment, becoming a landlord can be a hands-on job. It can be very challenging to keep the property looking its best and the people happy. However, by carefully choosing the right tenants and properties, you can lower your risk of having issues.

The amount of rent that a landlord can charge depends on the location of their property. It can be hard to determine the best amount to charge due to how much you’ll likely chase away potential tenants and how little you’ll be able to leave on the table. One of the most common strategies is to rent at a steady amount to cover the expenses until the mortgage is paid.

If the value of your property appreciates, you may be able sell it at a profit and use the equity to fund your next investment. However, this doesn’t mean that real estate will always appreciate.

During times of extreme market volatility, such as the COVID-19 pandemic, real estate prices can still appreciate. From February 2020 to 2022, the national median home price increased by 38%.  These prices continue to go up in 2023 in most real estate class’s.  Many are questioning if the market is headed for a crash after the rapid growth.

Short Term Investors – House Flipping

Unlike other types of investors, real estate “flippers” don’t buy properties for a long time. Instead, they purchase them with the intention of selling them for a profit after a few months.

One of the most common ways that investors can make money from their real estate investments is by flipping a property.

This strategy involves buying a property that’s likely to increase in value due to certain repairs. After completing the work, you can sell it at a higher price.

This flipping strategy differs from other types of investors. Unlike buying a property and then fixing it up, this method involves holding for a few months and selling it at a profit.

If you’re planning on selling a property through either of the two flipping strategies, you’re at risk of not being able to achieve a profit. This is because flippers typically don’t have enough cash to pay for the mortgage for the long term. Despite this, flipping can still be a great way to make money from your real estate investments.

REITS – Real Estate Investment Trust

An investment trust is a type of real estate investment fund that uses investors’ money to purchase and operate properties. REITs are commonly traded on major exchanges.

As a REIT, a company must distribute at least 90% of its taxable profits to its shareholders. This allows it to avoid paying corporate taxes. It also allows the company to distribute its dividends to its shareholders.

Although REITs are commonly used by investors for their regular income, they also provide an opportunity for appreciation. They typically invest in various types of real estate, such as office buildings, malls, and mortgages. Unlike other real estate investments, they’re very liquid.

A real estate mutual fund is typically focused on investing in both operating companies and REITs. It allows individuals with a small amount of capital to diversify their exposure to the sector.

Partnerships

A limited partnership is commonly referred to as a real estate investment trust. It invests in properties or a combination of properties. It can only exist for a certain amount of years.

A general partner of a limited partnership is usually a property manager or a real estate development company. They then look for outside investors who can provide financing for their real estate projects. The partners usually receive regular distributions from the company. However, the real payoff comes once the properties are sold.

 Mutual Funds

With a small amount of money, a real estate mutual fund can provide diversified exposure to the sector by investing in both operating businesses and REITs. These types of funds also have a more diverse asset selection than buying individual REITs.

Retail investors can benefit from the research and analytical capabilities of real estate mutual funds. These types of funds provide detailed information about the performance of their assets and the strategies of their managers. Motivated speculative investors can also take advantage of the diverse asset selection of these types of funds and overweight certain regions or properties to achieve the best possible return.

Advantages of Investing in Real Estate

An investor’s risk-adjusted returns can be enhanced by investing in real estate. It is generally less volatile than bonds and stocks.

Compared to other income sources, such as bonds, real estate is appealing due to its yield-enhancing characteristics. It trades at a premium to US Treasuries, making it an ideal asset class in an environment with low interest rates.

One of the most important advantages of investing in commercial real estate is its ability to diversify. Since it has a negative correlation with other asset classes, it can provide an enhanced return per risk. It can also lower volatility and provide a better hedge against market swings.

Unlike other income sources, real estate is protected from principal-agent conflicts and the degree to which the investor’s interest is affected by the competence and integrity of the debtors and managers of the company. In addition, some REITs require that at least a portion of the company’s profits be paid out as dividends, making it one of the safest types of investments.

The ability of real estate to hedge against inflation is due to the positive correlation between the country’s GDP growth and the demand for properties. As economies grow, this increases the need for real estate, which in turn increases the prices of properties. This means that real estate can maintain its purchasing power by absorbing some of the inflation pressure and then adding some of it to the capital values.

Unlike stocks, real estate can provide an investor with a tool that is not available to other investors: leverage. This is a type of debt that allows an individual to borrow more money to finance a larger purchase. If you want to buy stocks, you have to pay the entire value of the stock at the moment that you place an order. Even then, the percentage of money you can borrow is still much lower than with stocks due to the magical financing method known as the mortgage.

In most cases, a mortgage with a lower interest rate can be obtained for as little as 5%. This type of loan allows an individual to own the entire property without having to pay a huge amount of money. Even though the size of the mortgage can affect the amount of equity that you have in the property, you still have total control over it once the documents are signed.

This is very advantageous for landlords and real estate flippers. They can use a second mortgage to purchase multiple properties, and they can rent out the units to their tenants. Even though they only paid a small portion of the property’s value, they still have total control over it.

Home prices tend to follow the inflation trend. This is because the costs of building a home are increased with inflation, which must then be passed on to the buyers.

Since real estate is a costly asset, loans are typically required to finance the purchase. Due to the rising interest rates, the payments on new loans can be more costly. This can discourage potential buyers, as they have to factor in the costs of carrying the property month after month.

Now Is time to invest!

One of the best investments for people looking to build wealth and steady their income is real estate. However, this asset can be very illiquid, as converting it into cash can be challenging.

Unlike bond or stock transactions, the process of buying real estate can take months to complete. Even if you have a broker, it can take several weeks to find the right counterparty. Despite the advantages of investing in real estate, it is still very volatile and can be very costly. This is why it is important to consider investing in a real estate mutual fund or a real estate investment trust. These types of funds have a higher correlation to the stock market than traditional real estate investments.

Before investing in real estate, it is important that you do your homework. This will allow you to make an informed decision and avoid making mistakes.