During these COVID-19 times, we are facing the impact of the virus on the financial sector and the economy at large. Many homeowners or potential real estate buyers are seeking answers to the question, exactly how has the coronavirus affected the real estate market?
Financial experts have noticed a short-term trend of a decline in home purchases but expect that in the long-term, real estate investment will continue to rise. The fact remains that the demand for living space is still more than the real estate supply and will remain unaltered by the current epidemic. In the long term, the real estate market will continue to be viable from an investment point of view.
Despite these trying times, real estate investing remains one of the safest financial investments you can make. Let us consider just a few reasons real estate remains the surest ways to build up your long-term wealth.
Capital Appreciation
Real estate is one of the top-performing asset classes and beats even hard assets such as precious metals in return on investment (also known as ROI). If you own your own home, you will already enjoy capital appreciation in this ever-growing property market. Although the returns on real estate might not match that of stocks, they carry far less risk and have held a return of 5% each year for the last thirty years.
Beat Inflation
If you are seeking to build long-term wealth, real estate is a much better option than savings. With the annual inflation rate in the USA for 2020 projected at 2.24%, it makes sense that real estate wins hands down with a steady average growth of 5%.
Low Interest Rates
With the Federal Reserve cutting interest rates to near zero, it has never been more affordable to purchase real estate investments. The Fed calculates the monthly payments of lenders according to the latest interest rates, so it is an excellent time to add more real estate to your portfolio if you have the means.
Use Your Mortgage as Leverage
Once you have been paying off your house over several years, you will reach a time when you have repaid a substantial amount of your mortgage.
The best part is that your equity increases as the value of your property increases and investors refer to this is as leverage. You can use this equity as leverage to create other investment opportunities and increase your wealth.
Earn Passive Income
Your own home will sadly not provide you with substantial returns or passive income, so you can’t define it as a lucrative investment. But leveraging your mortgage to purchase a second property can be your real investment.
Rental of properties provides a monthly income (as long as your rent provides more than your mortgage.) This positive cash flow allows investors to invest in further options and grow their long-term wealth. Many successful people have built up their wealth this way, by using leverage until their passive income provides enough to create financial freedom.
Real Estate Carries a Lower Risk
We have all lived through or learned about stock market crashes. Depressions, recessions, and economic upheavals are not uncommon. With a hard asset like real estate, you have some protection from the vagaries and downswings of our modern economy.
Tax Advantages
If you own your property, the most basic tax benefits are the deductions you may take from your investment property, such as:
- Property insurance
- Mortgage interest
- Property tax
- Property repairs
- Advertising fees
- Property management costs
Depreciation
If you rent out your property or use it for business for over a year, you may depreciate your property costs. This is accounting for the decrease in value of your property over the years, where the property might suffer wear and tear.
Not only can you deduct for annual depreciation for the property, but you may also depreciate certain capital expenses such as re-roofing and major renovations.
Real Estate vs. Stock Risks
We all saw what the banking crisis of 2008 did to the economy. Not even real estate was immune to a marked decline in value. This time around we have the COVID-19 crisis to deal with and this illustrates some risks behind property investments.
Real estate is not as liquid as the stock market and one cannot guarantee a buyer for your property when you may need it most. Real estate requires more work than buying stocks, and the initial outlay is expensive. Real estate is illiquid, and one can’t count on successfully selling them in a time of need.
Transaction costs are also higher in real estate investments, and it is time-consuming and costly to maintain and oversee (particularly with a rental). That being said, real estate may provide considerable leverage, which is crucial in creating opportunities for further investment and growing your wealth.
Real Estate Value Always Increases Over Time
Despite geopolitical circumstances, the real estate market has proven that it can weather changes. The demand for residential space rises exponentially along with population growth, especially in metropolitan areas and the cities. So, although the market may be affected by the coronavirus epidemic, the demand for residential space still outweighs the supply.
Flexibility
Investing in stocks or bonds lays you open to factors beyond your control that may affect your success. The real estate game is more flexible and offers more options. You may purchase the property intending to flip it and if there is a dip in the market, you may rent it out until the market improves.
If you buy a rental and it’s price increases, dramatically you may sell it. You may develop, subdivide, or expand properties according to the current economic climate so even though it is an illiquid asset, real estate is a flexible asset class.
Ways To Grow Wealth from Real Estate
Buy-to-hold: You may purchase real estate with a long term 10 to 20-year plan to benefit from long-term capital appreciation. As the value increases, so will your equity, and investors may use this as a strategy to purchase property in an area experiencing rapid development and reap the benefits over time.
Buy-to-sell: This strategy carries a high risk, but many moguls made their fortune this way and many have lost it too. It is a short-term plan to take advantage of high property price inflation. This involves buying property to resell in the short term.
Fix-and-flip: This strategy involves buying a run-down property in a good area and renovating it. The investor may then sell the house at a significantly higher price. This is less risky than the buy to sell strategy.
Buy-to-let: This is the best strategy for real estate investment because it delivers not only a passive income but ongoing capital growth.
Conclusion
Many billionaires will testify that real estate is the best asset class to grow your wealth. Less risky than stocks and bonds, real estate will provide you with leverage in the form of equity and provide a great platform for investors to diversify their portfolios or create a growing passive income.
Not that real estate is in any way the easiest means of growing your wealth. It is time-consuming and expensive and fraught with its own set of disadvantages. However, in uncertain times there will always be a call for property whether as a rental or to own. One thing is certain, the population is growing, and people will seek a roof over their heads. Let’s just hope you will be the person who owns it.
photo by: Marcel Suliman