It is common knowledge that investing in property begets wealth. The richest people in the world have made their wealth by investing in real estate properties. But to create wealth by such investments requires an understanding of the driving forces that fuel real estate.
According to UpNest, a real estate website, the driving forces include the following:
● Inflation: Although inflation hits people, for real estate depositors, it can create wealth. This is because not only does the monthly payment on a fixed-rate loan stays the same for 30 years, but taxes and insurance, too, increase very slowly, if at all. The worth of a property rises each year, but the cost of possessing it doesn’t due to inflation. Thus, the value of your asset will increase year after year thanks to inflation.
● Appreciation: If you have invested in a property where the value of homes increases rapidly, then the value of your property will also increase year after year without any extra capital expenditure. So, the location of the property becomes essential.
● Yearly rent increases: Since the cost of housing keeps pace with inflation, the property you own does not. This is because your mortgage interest rate is fixed. So, while the rental income of your property increases, your costs remain the same. This adds to your profits.
● Depreciation: This does not mean depreciation in the value of your property, but the tax break that IRS allows real estate investors. It allows you to deduct a percentage of the value of the investment property for its IRS-determined lifespan.
● Leverage: Leverage means using other people’s money to make money. It uses borrowed capital to increase the potential return on investment. In real estate terms, it means making money from property that is worth much more than your cash outlay.
Steps for profitable real estate investment
Once you understand the driving forces influencing real estate, you get the idea of how to buy real estate safely. Let’s see what all you should look for while investing in property.
#1 Buy property in budding real estate markets
Look for property in up-and-coming areas. The cost of real estate in these locations will below, but the value is bound to rise with more people with better income moving into the area. Once these neighborhoods become more sought after, the property is bound to get appreciated every year. The key is never to sell such property, but rent it out for regular income.
#2 Have a clear aim while investing
You can only get a precise aim of why you want to invest in a particular real estate through thorough research. This will not only give you a clear end goal but also help in forming an exit strategy. Once your real estate investment aim is clear, real wealth is bound to follow.
#3 Earn from rents
The best way to earn from your real estate is to give it out on rent. If you have invested in residential real estate, it will be easier to rent it out. Such property retains its value even in the event of a downturn.
#4 Invest in multiple rental properties
Buying multiple rental properties is the most effective way to create wealth in a short period of time since you receive money from multiple income streams. This is not the only advantage. Such properties also spread out the risk of unpredictable market movements.
#5 Timing is everything
Timing will help optimize your capital gains. Although everyone buys during the ‘boom’ phase, buying in the ‘non-boom’ phase, when everyone is selling when the market is down, is advised. The key to identify when the market is down is to discover the trend and then act on it.
#6 Buy right
In a real estate venture, money is made when you buy, not when you sell. This is because your purchase price determines your profit later on. So, buy right by determining the potential value of a property. Find out the realistic sales price of the property after all the required repairs are complete. Also, find out what is the total scope of work to bring it to that value.
#7 Research, but also follow your hunch
You will need to do your homework by using all the information at your disposal while investing in real estate. Although research is a good indicator of the suitability of investing in a property, don’t ignore your instincts. At times, relying on your intuition or gut feeling shows you the right way.
There is no doubt that investing in real estate is the most effective way of wealth creation. This is because few ventures offer the same level of flexibility as real estate investing. However, deciding where to start can be challenging. These tips will help in making the right decision regarding real estate investment.