🎓 Is Real Estate Investing For You?

Why Invest in Real Estate

If you read our post from last week you should know that inflation is a killer and the best way to combat inflation is investing in limited assets. Real estate is a perfect example of a limited asset.

Along with being a great hedge against inflation real estate can also be extremely profitable. It is possible to get returns far greater than what the stock market can provide.

Real estate investing is essentially buying property ranging from single-family homes to huge apartment complexes or even office buildings.

Real estate has four ways you can get returns…

1. Rent, you can charge tenants monthly rent and collect cash every month. (typically 8-12 percent)

2. Appreciation, because real estate has a limited supply with an ever-increasing demand real estate generally appreciates every year. (over 14% a year is average)

3. Equity, you normally buy real estate using a mortgage, but when you have a tenant paying for the property every month some of that money goes into principal increasing your equity in the property. (in 5 years you gain roughly 9% equity and that number increases every year)

4. Depreciation, when you own a piece of property you get tax benefits to help pay for possible damages done to the property (depreciation is normally 3.636% of the property per year)

The average return on a piece of real estate is roughly 10.6% per year, significantly better than the stock market. This can be much higher too if you are smart about investing and willing to do the work.

The advantages of real estate should be obvious at this point. Higher returns, owning real-life property, and the tax advantages that come with it, but what are the downsides?

Downsides of Real Estate Investing

The truth is not everyone can invest in real estate, and it can take much more money and time to start investing in real estate rather than other investments like stocks.

One of the biggest factors that makes real estate investing harder than other forms of investing is money. In order to start investing in real estate you generally need enough for a 20% down payment. This can go from $20,000 up to hundreds of thousands of dollars, even millions depending on what you are investing in.

For a $400k house, the downpayment would be $80k. Most people simply do not have that kind of money to throw into one investment.

Another big part that stops people from choosing real estate even if they have the money is the work it takes. I can go and buy an index fund in under two minutes but buying a house can easily take hours. Also after you buy the property it needs to be managed and if you don’t want to pay a ton for a property management company to do it for you then you will have to do it yourself.

The third biggest con is that it is risky. Real estate has many more random things that can go terribly wrong and ruin your investment. You can deal with legal issues, squatters, property damage, and vandalism, you might need to pay for repairs, or you might even have a hard time finding tenants.

Real estate investing is very different from investing in stocks or bonds and includes so many extra factors and work that stocks do not take. Some more things to consider before investing in real estate are…

• Location, not all locations are created equal and in some places, it is really hard to make money in real estate

• liquidity, it can take days or months to sell a property so if you have an emergency and need cash you can not rely on your real estate.

• Complexity, it takes a lot of knowledge to get started with real estate investing, and not everyone is willing to learn.

• Leverage, most of the time if you want to invest in real estate you need to take out a loan. Some people avoid going into debt like the plague so they stay away from real estate

So is Real Estate Right For You?

If you have the drive and determination to collect the benefits of real estate investing and you live in a good area for real estate investing it is likely a good choice for you.

Over 90% of millionaires invest in real estate so that should be enough to tell you that it is a very profitable investment. If you want higher returns than the stock market and are willing to sacrifice time, some peace of mind, and a bunch of money you could definitely go into real estate.

If you want simplicity and to just let your money compound over time without stressing or worrying about it you might be better off sticking to investing in stocks or index funds.

In the end, deciding whether or not to invest in real estate you need to weigh the pros and cons and decide if real estate fits into your personal lifestyle.

What is a REIT

REIT stands for Real Estate Investment Trust. If you are not sold on the idea of investing in real estate but still like the idea of diversifying into the real estate market REITs might just be the thing for you.

A REIT is a way companies can raise investor money to buy real estate, by law REITs are required to pay out 90% of profits as a dividend to their shareholders.

A REIT will go out and buy properties, rent them out, take care of them, and take on the risks for you. This way you can buy REITs just like you buy a stock so you don’t need to worry about all the complexities of managing property yourself

There are a couple of ways to invest in REITs. One way is through a brokerage account, most accounts let you invest in REITs and all of the accounts I use let you invest in REITs. Another common way to invest in REITs is with apps specifically designed for REIT investing, the one I use is Fundrise. Fundrise also has other investment options including private credit and startup funding.

I personally hold multiple REITs to diversify my portfolio and take advantage of the monthly income they pay out.

If you want to get started with REITs do your own research on some of the best REITs and choose a REIT that aligns closest to your investment objectives. Some popular REITs you might want to consider taking a look at are O and MAIN.

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