Purchasing a property as an investment isn’t an option most people choose because it is believed that it’s expensive. While that may be true, buying a property as an investment is an excellent choice for people looking to build wealth over time. Andrew Carnegie said that most millionaires obtained their wealth by investing in real estate.
Below is an extensive guide on everything you need to know about purchasing a property as an investment.
What Are the Advantages of Buying a Property as an Investment?
One of the main reasons why purchasing a property is a good investment is that it allows individuals to pay a fraction of the entire cost of the property for a start. For instance, if a rental home costs $100,000, an individual can put down $10,000 as a down payment and maybe apply for a mortgage loan to complete it.
Another underestimated advantage is that it is possible to speed up the value of a property. Typically, the average appreciation rate of any property is about 3-5% annually. However, an individual can increase this rate through repairs or renovations.
If done carefully, renovations can pay back a property owner as much as 90% of their investment. That is why individuals need to ensure that the renovations they are making in their properties will increase their value.
Purchasing a property, especially to rent it out, can also provide the owner with a steady income.
Another benefit of investing in real estate is that it is a tangible asset. Unlike bonds or stocks, an individual will still have their property regardless of whether its value increases or decreases.
What Are the Risks of Purchasing a Property as an Investment?
One of the main disadvantages of investing in real estate is that it is expensive over time. Apart from purchasing the property, an individual still has to pay back the mortgage loan (if they took one) and cover the insurance, tax, and maintenance costs.
Another major drawback of buying a property as an investment is that it cannot sell as quickly as other assets, like shares and bonds. What’s more, if a person buys a property in a location with no demand, it may take years for them to find a buyer.
Mortgage loan interest rates may also increase, forcing individuals to dig deeper into their pockets to repay the loan. Getting returns from real estate is also time-consuming. This can be discouraging for people looking to make money quickly.
Individuals investing in rental houses may also have to deal with difficult tenants who don’t pay their rent on time or leave their homes in poor conditions when they move out.
Factors to Consider Before Buying a Property as an Investment
Before investing in real estate, the first thing to consider is the property’s location.
Location plays a significant role in the overall value of any property. Therefore, buyers should ensure the asset is in a good location before purchasing, especially for renting out.
If a person is looking to invest in a rental home, they should choose one near social amenities such as hospitals and close to grocery stores, freeways, and transport hubs.
Another factor to consider is the cost. Buying a property attracts a lot of other expenses other than the cost of the property itself. So, before individuals invest in real estate, they should evaluate the additional costs to determine whether they can afford it even when the property is not generating any income.
Experts also recommend evaluating the current value of the property. While buying a cheap property may look beneficial, it may become more expensive because of the renovations and repairs it needs.
It is also recommendable to consider the expected returns or profits from a property. Doing so will enable buyers to determine whether purchasing that property is the best investment choice for them.
Investing in real estate is an excellent way to generate wealth over time. Apart from a property having the potential to increase in value, it also guarantees the owner of a steady income.
However, it is essential to understand how the world of real estate works, including its pros and cons. Like any other investment, real estate can generate a lot of profit only if an individual goes about it the right way.