Does real estate investment offer a path to wealth? Historically, considerable evidence suggests that investing in real estate, both residential and commercial, should be a crucial part of one’s portfolio. Please continue reading to see our top reasons for favoring real estate.
Being a Long-Term Investment That Can Also Provide (When Leased Out) a Regular & Reliable Cash Flow
An investment that both appreciates in value, sometimes rapidly, sometimes steadily, but – overall – reliably, while also providing owners with the potential for regular income and the chance of achieving a positive cash flow after expenses are factored in, is a no-brainer for most investors. Yes, there have been crashes in the not-so-distant past, and yes, there may be issues with tenants, vacancies, and maintenance issues, but despite that, in the long run, real estate has been shown to increase in value and to provide a reliable ROI.
Suppose rental income exceeds the costs of a mortgage, maintenance or home association fees, occasional repairs and updates, and insurance costs. In that case, the cash flow remains positive, and the long-term appreciation is a bonus.
Offering Tax Breaks
Owners can write off part of the value of their investment each tax year against rental income.
Benefiting From Leverage
Most investors will be using a mortgage to buy their property. This allows for both appreciation and rental income to be based on the total value of the property when the investor may only have paid as little as 20 percent of that value upfront. If a $500,000 property appreciates 10 percent, it has gained $50,000; however, if the owner only made a down payment of $100,000, they have made a profit of 50 percent – pretty impressive!
Being a Reliable Inflation Hedge
Real estate provides an excellent inflation hedge, usually appreciating at least in line with inflation. Additionally, inflation means that rental income should also see regular increases. Investors in commercial real estate, where tenancies may be longer, may have to wait for a little for rental increases to catch up with inflation; however, multi-family rental units will generally keep pace. With inflation at present reaching close to 40-year highs, real estate provides a safety net; not only is it an effective way to build wealth, but it offers protection against losing large portions of one’s wealth to the effects of inflation, in the long term.
“Real estate’s inflation-protecting capabilities are best suited to long-term owners who are prepared to ride out the fluctuations of multi-year economic and real estate cycles.” – Avison Young, Dr. Nick Axford; Dr. Alexandra Krystalogiannni February 2022
Real estate as an investment will not usually be a get-rich-quick scheme, but it provides a path to wealth as a long-term strategy. Investors who include real estate in their portfolios will often purchase multiple properties over time, allowing them to reap the benefits of different income streams from rentals while selling some of their properties as and when market conditions are favorable. While just one property can provide capital growth and regular income, using profits and/or income generated by one property to finance the acquisition of a second, then a third, and so on, can be an effective way to build wealth over time while also providing an efficient inflation hedge. Additionally, real estate can create generational wealth, being easily transferable through successive generations.
Private lending
Apart from creating one’s portfolio of properties, investors with access to spare capital can also consider becoming private lenders as a path to building wealth. For the most part, private loans will be used for the acquisition, or development, of real estate or possibly for the expansion of an existing business.
As such, the lender enjoys the security of having their loan backed by a tangible asset. The private debt market caters to people who are either unable to obtain the financing they need through traditional sources or need speedy, short-term loans to allow them to close a deal quickly or possibly renovate a ‘fixer-upper’ before ‘flipping’ it. Consequently, such loans are not only short term but assuming due diligence is done by the lender, they offer excellent ROI with minimal risk.
Private lending can be instrumental in creating a path to wealth for lenders for several reasons:
Predictable Returns With Excellent Cash Flow
A contract will be drawn up stipulating the terms for repayment of the loan and the rate of interest therefore offering reliable cash flow with no surprises.
Interest Rates Considerably Higher Than Those Offered by Banks & Traditional Lenders
Interest rates can range from 7% to as much as 28%, depending on the amount of risk and the terms of the loan.
Diversification
Private lending adds diversification to any investment portfolio, helping to protect against inflation.
Investment Is Secured by Tangible Assets
Private loans for the development or acquisition of real estate are backed by tangible assets that can be realized in the unlikely event of a default.
Loans Are Usually Short Term
Such loans tend to be short term, likely fewer than three years; consequently, lenders can expect to receive their capital back quickly.
Direct involvement
Some investors will enjoy the direct involvement that comes from loaning money for completion of a particular project. They know exactly where and why their money is being spent.
Of course, it is incumbent on the lender to carry out due diligence before offering loans. Why is the borrower looking for a private loan rather than obtaining financing from a bank or other traditional loan facility? How creditworthy are they? Private lenders should carry out the same checks as traditional lenders, including income verification and credit checks. Legal help is essential to ensure watertight contracts are drawn up stating the terms of the loan, the interest rate, and the repayment period.
But private lending does not only benefit the lender. A real estate developer may require private funding for various reasons; it is often worth the higher interest rates to close a deal quickly and without the red tape and delays involved with more traditional methods. Consequently, the borrower can complete a renovation and sale or scale their business rapidly to accommodate increased demand, allowing the acquisition of wealth to be facilitated for the borrower also. Ideally, both borrower and lender can utilize private lending to provide a path to wealth.