Deciding where to invest your hard-earned cash is an important decision. In fact, it is a decision that can either result in accruing wealth or financial disaster. Therefore, it is important to understand the risks and benefits that accompany different types of investments. Investing in property, for instance, is one type of investment that continues to catch the attention of investors due to its relative safety and profitability.
1. Profitable Ups And Downs
In general, the length of time you hold a property directly relates to the amount of profit you will experience. For instance, holding steady following a burst bubble can pay off in the end. A burst bubble in real estate causes home values to dip. However, prices eventually return to normal levels. While it is true that holding onto a property during this type of volatility can be difficult, keeping the fact that your property is a long-term investment in the forefront of your thoughts can help mitigate problems caused by short- term thinking. Short-term thinking can result in missing out on a nice return on your investment.
2. Inflation Hedging Via Rentals
An investment that provides the advantage of inflation hedging is one that is intended to protect the investor against a reduction in the buying power of money. The ability to invest in property to provide protection against inflation is a result of the relation between the demand for real estate and the gross domestic product (GDP) growth rate. Said differently, as an economy expands, home values and rents increase, which result in higher capital values. The take home here is that real estate typically maintains the purchasing power of capital as the financial pressures of inflation are actually passed on to the renter.
3. Low Barrier To Entry
Fortunately, when investing in property, you do not need a whole lot of money to make an investment. In fact, taking advantage of the many available financing options is a common way that many successful real-estate investors have started. For instance, many times, you will only need to put down a small percentage of the total cost of the property. You can then finance the remaining balance with a low- interest mortgage.
If you do not qualify for a mortgage, there are other options you can consider. For instance, you might be able to qualify for a personal or hard money loan. A hard money loan is typically a secured loan in which the lender uses a property that has a high value as collateral for the loan. The loan amount is decided based on the value of the property, and the loan is approved against a first lien on the property used as collateral. Having the right information regarding the options that are available will help you make the right decision based on your financial situation and investment interests. The increasing availability of technology has also made it easier to enter the market. For example, Paperless Pipeline which offers real estate transaction management software, allows investors to simplify the process into individual steps.
4. Long-Term Equity
In addition to providing cash flow each month, investing in property for a long duration builds equity in said property. This is because the mortgage payment is made via the amount you receive from the rent your tenant pays you each month. Over time, consistent mortgage payments build equity in your property. A great benefit of this is that someone else pays off your mortgage while you ultimately reap the benefits of your investment.
5. Diversified Portfolio
Maintaining a diverse portfolio of investments will help spread your money across a variety of investment areas. This diversification lowers your overall risk. For instance, experiencing a loss in one investment can be balanced by a gain in another. This loss-and-gain pattern tends to even out over time, which ultimately mitigates your risk. Additionally, because property is a relatively safe asset, adding this type of investment to your portfolio is a great way to reduce your risk.
6. Low Volatility
A main benefit of investing in property is the fact that you can enjoy a significant proportion of total return that accrues from the income a rental provides over a long period of time. This type of investment, which relies on steady income return, is typically less volatile than other investments that, for instance, rely on capital value return.
7. High Tangible Asset Value
Patents or trademarks are nonphysical. As such, they are intangible assets. Property, however, is a physical or tangible asset. As such, investing in property reduces the principal-agent conflict. The principal-agent conflict is simply the degree to which the investment is reliant on the abilities and integrity of debtors or managers.
Finally, when it comes to property, the value of this type of real estate investment will remain over time. Conversely, other investments, such as a new car that loses its value over time or stocks that can drop to zero, can have little to no tangible asset value. Don't even get us started on cryptocurrency! Land, like gold and silver, almost always has value that grows over time.
Eric Reyes is a passionate thought leader having been featured in 50 distinguished online and offline platforms. His passion and knowledge in Finance and Business made him a sought after contributor providing valuable insights to his readers. You can find him reading a book and discussing current events in his spare time.
