Are you planning to invest in real estate? However, you might be thinking that it's a risky investment. Yes, it's actually safe to invest in real estate properties. According to Gallup's yearly Economy and Personal Finance survey that was conducted last April 2020, real estate was ranked as the top investment choice for the larger part of Americans which is at 35 per cent.
Meanwhile, stocks and mutual funds are at 21%, savings accounts at 17%, gold at 16%, and bonds at 8% which places real estate ahead of them and is considered as the most selected investment.
Although we can say that real estate investment is safe and it may be at the top pick, it's no different to other types of investments that have risks. With that being said, we'll discuss some of the major investment risks of real estate that you need to watch out for if you're thinking about buying an investment property.
Reasons Why Real Estate is a Safe Investment
Before we go in-depth and discuss the risks you may want to avoid, let's first discuss why real estate is a safe investment.
- Land and property are tangible items
Unlike stocks that you can't physically hold, real estate is a tangible item. Although you are given a stock certificate, this does not compare to the realness and tangibility of property purchases. If you ever want to invest in real estate and buy a property, you will be given a physical certification of your investment.
- Real estate will always be valuable
Its tangibility alone adds highly to its worth this is why it's impossible for property or a piece of land to be worth zero dollars. However, a stock can achieve those depths quickly.
- The real estate market is fixed
The stock market is a volatile one that has plenty of ups and downs that can give you a headache while real estate is steady.
- You won't have to be scared about inflation
When prices go up, rents increase too! Real estate can offer a barrier against this inflation. If you know how to manage your property, the worth of real estate will continue to increase at a rate that can repel inflation and still provide gains for you. Plus, you can claim a property depreciation which is simply compensation for wear and tear on rental investment assets. You can use a depreciation calculator to see how much you can depreciate.
- You may invest in real estate with whatever money you have
It may sound huge to put $300,000 into an investment. As you take out a mortgage to cover the expenses of the real estate, you will need to attain a down payment that is between 3-20% of the property. Fortunately, new investors who have little can put some of their money into mutual funds or REITs that are similar to how stocks work.
- You can mix your portfolio while still making investments in real estate
As a real estate investor, you can diversify your real estate portfolio by making investments in various locations, selecting properties with different levels of risk, or purchasing different kinds of funds or property investments.
Real Estate Investment Risks You Must Be Aware of
- The market of real estate is unstable
During the 2008 Great Recession and leading up to this time, a lot of investors have a misconception that the real estate market can only move in one direction which is up. Many investors believed that if you buy a property today, you can sell it for a higher price later on.
Although real estate tends to increase its value over time, the market is definitely is unpredictable so your investment could depreciate. The supply and demand, demographics, economy, interest rates, government policies, and unexpected events all play a crucial role in real estate trends, such as prices and rental charges. Do careful research and make sure you monitor your real estate holdings.
- Real estate has hidden costs that will eat into your profit
A wise real estate investor knows the importance of considering all of the expenses that come with buying and handling real estate. Some of these costs include:
- Inspections, repairs, and general upkeep
- Interest costs, private mortgage insurance expenses, and other costs of getting a loan
- Property taxes and HOA fees
- Rental property maintenance costs (costs for looking tenants, hiring employees, etc.)
If you don't take these costs into consideration in your overall budget, you may feel that you have failed to meet the potential gain when it is time to market and sell your property.
- You Don't Have Enough Money to Begin a Real Estate Investment
Be careful when deciding to invest in real estate, especially if you don't have enough money to start as you could be digging yourself a hole. For you to be able to buy an investment property, you must put down at least 3% of the down payment.
However, investors who can only pay 3-5% will need to pay down the line. Lenders will increase their interest rates or the price of private mortgage insurance for investors with poor credit or hardly enough money to put down. But you can still invest in real estate even if you don't have much cash on hand. Look into REITs or EFTs that will allow you to buy a property without the need to take huge loans.