Real Estate investment is one of the most popular investing methods when it comes to steady income sources and long-term growth. It is important to develop an informed investment strategy in real estate for long-term growth and to mitigate risk factors.
What is Real Estate Investment?
Real estate investment is a method of purchasing, leasing, managing, or renting physical or real estate properties for profit. Investors generally invest in real estate for one of two reasons, to earn steady money, and wealth, or for investment purposes. However, it is important to find a good property that can provide high returns with minimum risk.
Key Takeaways
- Real estate investment is considered one of the best investments due to its high-income potential and long-term growth.
- It involves investment in commercial flats, homes, condominiums, etc.
- Investors can earn through an increase in the value of real estate or through rentals.
Types of Real Estate Investment Properties
Investors invest in different types of properties to maximize their earnings and diversify their investment portfolios. There are many types of real estate investment properties; however, the two major classifications of real estate investment are mentioned below.
1. Residential Properties
This type of property is purchased with the intention of earning returns through rental income or resale when the price of the property increases. It typically involves homes, paying guests, flats, townhouses, etc. Residential properties can vary based on the number of rooms and the size of the family.
2. Commercial Properties
Commercial properties are big rental apartments given on lease or sold for commercial purposes like retail stores, offices, inventories warehouses, etc. They are generally kept for business or non-residential purposes.
This type of real estate investment is of high value and requires heavy investment. For commercial property rentals or leases, separate agreements and paperwork must be started.
Note: Apart from these two classifications real estate investment also deals in industrial properties, retail properties, specialty properties like healthcare, hotels, etc.
Pros of Investing in Real Estate
Real estate investment is considered one of the best investment ideas to generate high-income returns and long-term profit value for investors. The benefits of real estate investment can vary based on the goals of investors and their risk tolerance capabilities. Let us know some of the major benefits of real estate investment below.
1. High Income Generation
Investments in real estate can generate a stable income source and have the potential for long-term growth. Similar to stock investments, real estate properties also provide capital appreciation in the long term. You can generate stable income through rentals or leasing your property. You can earn money in the following ways.
- Giving your properties at monthly rentals
- Commercial real estate for retail shops, office space, inventories, and more with rentals slightly higher from accommodation
- Sale and buy real estate properties to earn through capital appreciation
2. Diversification of Assets
Real estate has a low correlation with stocks, bonds, or equities, which means that it does not move in the same direction as the stock market. When stock markets are down, real estate may perform well and hence it can stabilize the investor’s overall portfolio despite the blow. Real estate investment can help fight the uncertainties of the stock market.
3. Rental Income
The biggest flex of real estate investment is the rental income that it provides for the long term without any additional work or investment. You can earn rentals through residential properties or commercial properties. Rental income can provide a stable income source or alternative source of income when you are investing in other stocks, equities, etc. Unlike high risks on other investment opportunities like stocks, bonds, etc.
You can adjust your property rentals based on their size and market rates. Investors can set a secured income with minimum depreciation.
4. Tax Benefits
Real estate investments allow investors to lower tax rates on capital appreciation as compared to other assets. If you keep a property for a year or more rather than sell it for a profit, then you are eligible for low tax rates for long-term capital gains. This reduces tax liability on the overall portfolio of investors.
These tax benefits and long-term growth make real investment the best choice for investors. By carefully investing in real estate after taking these tax benefits into account, you can earn maximum returns on your investment.
5. Inflation Hedge
Real estate acts as a hedge in case of inflation, protecting against losses. Real estate properties can maintain a continued high rise in value and prevent frequent losses during inflation.
- During inflation, the cost of building materials, labor, and land rates can lead to the overall increase in the value of property.
- Rental income also increases with inflation, thereby protecting investor’s income flow.
- Tax benefits on real estate investments protect investors from high rises in prices of other commodities or services.
Cons of Real Estate Investment
Along with the benefits, real estate investment consists of risks and uncertainties like other investment assets. Let us learn about some of the disadvantages of real estate investments.
1. High Initial Investment
The most challenging situation in real estate investment is the high-priced initial investment in real estate properties with additional expenses. Unlike other investment options, where investors can start with a low price of 100 rupees. Real estate investment includes additional expenses for repairs, insurance premiums, maintenance expenses, and others.
In real estate, acquiring and maintaining a property demands a continuous flow of money. This becomes a big challenge for investors who lack a significant amount of money.
2. Low Liquidity
Real estate investments are low in liquidity due to the lengthy process of selling, listing, and marketing to find the best buyer, which may take weeks, months, or even longer. Real estate markets are also dependent on market conditions and buyer availability.
3. Market Volatility
Real estate investment is influenced by market volatility and economic factors. Real estate properties can experience frequent surges in prices due to economic conditions, changes in interest rates, or other reasons. These rapid declines in the value of the property can lead to the loss of equity for owners who purchased it at a high price.
4. Due Diligence
It is important to review a property’s financial health by assessing its value, rental rates, local market accessibility, maintenance costs, and more. Major checks like market analysis, return on investment, cap rates potential appreciation must be taken into account to avoid financial losses and other major risks.
5. Management Issues
Taking care of properties is a tough task with so many things to take care of. Many investors have multiple properties and they need to make additional expenses in taking care of these properties such as proper screening, cleaning, maintenance, collecting rent, repair issues, and more. Failing to keep a regular check may raise legal issues due to disputes and other issues.
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Real Estate Investment FAQs
Q1. Which real estate investment is best?
Ans: Real Estate Investment Trusts (REITs) is one of the best options for investment in real estate without the pressure of managing physical assets and managing them. You can invest in equity REITs, hybrid REITs, and mortgage REITs.
Q2. Why Real estate investments are good?
Ans: Real estate investments provide a steady flow of income and long-term potential growth. It also offers diversification of assets and risk mitigation and more. Read the article to know why it might be the best investment option for you.
Q3. What is real estate investment?
Ans: Real estate investment is a method of purchasing, leasing, managing, or renting physical or real estate properties for profit. You can earn through rentals, leased properties, buying and selling, retail stores, hotels, etc.
Q4. Which is better Real estate or FDs?
Ans: This totally depends on the financial goals of the investors. If you want to earn high returns and significant growth in your assets. FDs is a low-risk investment option with slow interest rates generally kept for a long time. If you want less risk investment and guaranteed returns with a fixed interest rate go for FDs. However, if you want a high raise considering the risks then go for real estate investment.
