Billionaires and fund managers are buying up properties all over the country. Homeowners are interested in keeping their assets and making use of them. And aspiring young investors are clamoring for an opportunity to get involved in the real estate game.
No matter where you look, people are excited about investing in real estate. It’s an incredible long-term investment, and has been for many decades, but what is it that makes this asset so reliably strong?
Ways to Make Money
First, understand that there are many ways to make money with real estate, and you can often use multiple methods simultaneously.
- Renting. Whether you’re renting to residential tenants or businesses, and whether you’re renting a luxury property or a discount one, you can probably make a good profit with a rental. In this arrangement, you’ll be responsible for maintaining the property and paying for its upkeep, and your tenants will pay you rent, often exceeding the sum total of all your expenses. You can even hire a property management company to take care of the property on your behalf, turning this into a totally passive income source.
Obviously, some rentals are going to perform better than others, and renting a property isn’t always a good strategy. Still, in many cases, this is highly reliable and highly profitable for owners.
- Long-term appreciation. Historically, real estate prices have tended to rise across the board. Properties are valuable assets that tend to increase in value over time (for reasons we’ll explore in the coming sections). Because of this, simply holding onto a property can make you money; in a few years or a few decades, the value can multiply.
- Speculation and flipping. Some people choose to make money via speculation and house flipping. They scout for good deals, such as cheap neglected houses or properties in neighborhoods that are unattractive. With the right fixes and a little luck, you can make a lot of money by turning things around.
You can also make money in different settings, in different types of neighborhoods, and with different types of tenants.
The Finite Supply
One of the factors that makes real estate so reliably valuable is its finite nature. In a given neighborhood, in a given city, and even in a given country, there’s a limited amount of available land. With a growing population and growing demand, it’s only natural for the limited inventory to rise in price and attract more interested buyers.
In the world of economics, leverage refers to your ability to invest with borrowed money. This allows you to invest more money than you currently have, multiplying your financial influence and multiplying your potential profits. It’s extremely common to take out mortgages to pay for houses, allowing you to borrow upwards of 95 percent of the purchase price – and giving real estate investors access to incredible leverage.
Investors have significant confidence in the performance of real estate because of this asset’s historical performance. With many decades of steady returns, few people are worried about the potential devaluation of this type of asset.
Unlike shares of stock, real properties are incredibly versatile holdings. You can use them for a wide variety of things and change how you use them over time. For example, you can buy a single-family home for you and your family to use as a primary residence for many years.
After moving out, you can convert it into a multifamily rental and start making money from it. If that doesn’t work or if your goals change, you can demolish the property and rebuild on your own land – or just sell the property for a profit and invest in something else.
This area is even more versatile when you consider real estate investment trusts (REITs). These financial assets allow you to get indirect exposure to the real estate market by investing in active organizations that manage their own property portfolios.
Portfolio Diversification Opportunities
Any investor worth their salt will tell you it’s important to diversify your portfolio. Basically, that means holding assets of many different varieties to minimize risk and maximize your potential returns. To properly diversify an investment portfolio, it’s a good idea to have at least some exposure to real estate. But one of the benefits of real estate is that you can diversify your holdings within this asset class significantly. Holding both residential and commercial real estate, having both single-family and multifamily properties, and investing in different cities can help you do this.
No matter how you look at it, real estate is a valuable investment. This isn’t a perfect asset, because there’s no such thing as a perfect asset, but it’s an important and rewarding addition to almost any financial portfolio.