Is real estate a viable alternative investment, able to provide you with that financial safe future?
According to The Mix, a charity that is dedicated in helping young people up to the age of 25, more than half of young people in the UK are worried about their financial futures. The myth that alternative investments are a complicated option is no longer true, and this is now a viable option for many people, no matter what your background. “Alternative investments will generally offer you more consistent and stable returns as opposed to more traditional assets, and the overall return will be higher.”
Obviously the most well-known alternative investment is real estate, which can provide you with additional income as long as you do the appropriate research. There are many benefits to investing in real estate, the most important and essentially, well-known is the steady flow of cash you will receive per month if you decide to rent your property out to tenants. Another massive benefit is the return you will get in time, if your property increases in value, thereby meaning you can sell it for more than you bought it initially. Another handy way to make money, although this is definitely not a guarantee. Investment in the right property is key to see those hefty returns. There are also big tax benefits associated with real estate, essentially, you are able to deduct certain expenses with owning a property and some of these could be; your mortgage interest, your property management fees, property insurance and the ongoing maintenance costs. If you decide to sell your property in the future for more than you bought it for, the sale will not be taxed as income, but as capital gains which is an advantage because they normally come with a lower tax threshold than income tax. If you make the decision to invest in real estate you will diversify your portfolio, which could go a long way to protecting you in time of economic downturn. Although certain stocks might be performing badly, your real estate investment properties might still be increasing in value, thus these will protect you from any losses your other investments are making and cushion the fall a little bit. Renting your property out to tenants is known as passive income, which is essentially a monthly check that you have not worked for every day. This could be a big added bonus alongside your average paid job. Property investment gives you the ability to leverage funds. Imagine you have got your eye on a large family home which costs in the region of £250,000, you can buy the property without having to fork out the full amount of money you would need to buy them on your own, by using other people´s money to purchase your properties, loans for banks, mortgage dealers or credit unions, for example. Property investment gives you much needed protection against inflation. When the cost of goods and services goes up, normally the knock-on effect is that home values and rents increase too. The advantage here is that your property can provide you with rising monthly income to help you deal with the rising cost of living around you. One of the biggest motives to investing in real estate is to increase your cash, otherwise known as your building capital. The ultimate goal of selling your property for more than you bought it, has the added benefit of increasing your capital. As mentioned before, the most important point to bear in mind here, is that you must invest in the right properties that will, in the long-term, increase in value. The final benefit to investing in real estate, is one of the only non-financial benefits. Investing in property means being your own boss, which is an incentive to many investors. The other side to this is that you can make a real difference in your community by renting to people in need (residential real estate investment,) or even converting properties into a commercial venture which will bring much needed services into the community.
Now you know the benefits to investing in real estate, you need to know what kind of options are available to you. The easiest is certainly investing in Real Estate Investment Trust, a company in charge of profit generating real estate. You do not have the hassle of buying, or looking after any properties yourself, but investing in REITs means that you will receive a steady income in the form of the company´s profits. But before you make a snap decision it is important to consider the pros and cons of investing in REITs. A huge positive is the fact that there is massive potential for long-term capital growth, especially because they offer you a “strong, stable, annual dividend.” It would also be worth mentioning that according to Investopedia, “REIT total return performance for the last 20 years has outperformed the S&P 500 Index, other indices, and the rate of inflation.” REITs are also easy to sell as most are dealt with through public exchanges, a characteristic that softens the traditional problems of real estate. Some of the cons involved with REITs are that they do not provide a huge incentive regarding capital growth. 90% of their income must be paid back to investors which only leaves 10% to get reinvested into new real estate holdings. A final con is that REIT shares are taxed as average income which has a higher threshold than something like capital gains tax, and some REITs have “high management and transaction fees.”
If, on the other hand, you feel that investing in a property and becoming a landlord would suit you better, this is also an excellent option, providing you invest when property prices are low, enabling you to buy a property without an initial large outlay. Unlike the former, this requires a lot more responsibility, particularly if you buy the property with the idea of renting it out to tenants, whereby you have to ensure the place is liveable and meets the exacting standards. There are, however, several advantages to take into consideration, a steady monthly income from your tenants, as well as tax deductible expenses, for example any painting or building repairs to the property. As the tenants continue to pay you a monthly income, the property will increase in value, giving you a long-term appreciation value, which you can sell in the future when it suits you. Ultimately this also applies to the outright buying of a property, without the hassle of tenants, which you can also sell depending on the market appreciation value. As with everything, there are also some disadvantages to consider. Environment deterioration can cause enormous health and safety risks to a property and site assessment (ESA) must be carried out subject to buying the property and renting it out to tenants. Environmental surveyors will analyse those environmental factors present around the property and decide the current and future impact the property will have on the environment. Obviously this comes with its own price tag, and the results of the assessment might suggest more work needs to be done to the property before any tenants can move in, all of which means a steep initial outlay. The last disadvantage which must be considered is the behaviour of your tenants. Not every landlord is lucky enough to have impeccably behaved tenants, and if you are one of the unlucky few you might be required to fork out a lot of money after the tenants have moved out. Even worse, you might end up getting into a legal dispute with you tenant over the deposit, for example, or maintenance to be made on the property and this could be a lengthy process, which needs your time and hard-earned cash. Although there are associations to assist with these kinds of problems, for example, National Residential Landlords Association (NRLA), nothing can return the lost time over a legal dispute. None of this is meant to dissuade you from doing it, but merely provide you with all the information you need to research and make the correct decision. Being a landlord is fulfilling and satisfying, but also hard work, especially at the beginning.
Real estate is a definite alternative investment, providing investors conduct due diligence prior to investing in alternative investments. Many people are turning to real estate because they consider it a safer and more secure alternative, but like every investment opportunity it is not without its risks. Economically the sector can vary on a day-to-day basis, and you must go into this with your eyes open.