Why Real Estate? – The Holy Grail Of Wealth Building Assets
Homeowners often fail to realize that their home is an investment. You see… for many people, a house is only a home. And those who hold these notion dearly go into some kind of nerve gas symptom when anyone even tries to convince them otherwise.
Well, guess what? It’s an investment whether you like it or not.
In terms of asset classes, real estate is as proven as it gets when it comes to track record. Sure, you can criticize it for the turmoil is caused in 2008 when it lost 50% of it’s value. But consider that in stock market crashes, companies can cease to exists rendering their stocks worthless. For a house, no matter how bad the market punches, it will still be there.
In fact, so embedded in our minds that property is not an investment, that we often fail to recognize it as a viable option when weighing our investing opportunities. Why would you want to be at loggerheads with money?
But actually, the main reason why many people don’t put their extra funds into properties is something they don’t like to talk about. It’s the price tag.
Houses come with huge prices that the average citizen is unable to buy. This is even when everyone know the availability of financial leverage in mortgages and creative financing. Although the low capital outlay can be affordable, the thought of owing a huge about that has to be repaid on a monthly basis is a big turn-off.
Let’s say you have $20,000 sitting in the bank and you have decided to put that to good use instead of allowing inflation to digest it like yesterday’s barbecue.
Most rational individuals will intuitively realize that $20,000 is hardly enough to buy a bedroom of a house, let alone a complete house. But that amount of money will allow him or her to fully own some stocks. Buying stocks also make good conversation in social gatherings too.
But in such a scenario, real estate is not that far out of reach at all if you consider the leverage you can use.
What if your 20 big ones can allow you to take control of 10 times the amount of shares you could initially buy?
Would you do it when you can explode your profits by 10 times and only risk losing your initial capital?
When we put that into perspective, how good does real estate look now?
Many homeowners would not treat their home as investments. This is why they are willing to pay out-of-this-world prices for houses that are not really worth that much. But nobody says that your approach to your home has to be one way or the other.
You can also treat your house as both a home and an investment. Have you put that into consideration before?
You can let it play the role of a home as long as you are living there. Taking this route, you might not be able to reap the rewards of value appreciation and equity accumulation in your lifetime.
But if you made a shrewd purchase, your children could thank you for decades to come for making their lives that little easier.
They get to live rent-free which if you look at it from another angle, is cash into their pockets. Other than that, should they prefer to live in their own homes, the sale of your house will mean a very welcoming injection of funds for their own purchases.
So, if you have finally warmed up to approaching your house as both a home and an investment, let me seal the deal and show you more reasons why real estate is such an eye candy for homeowners looking to accumulate wealth.
You can actually use it
As mentioned before, a house is not just a piece of paper declaring that you own something which you keep in the drawer for the termites. You can actually live in it. That is a unique feature that blows every other investment out of the window.
Nothing else comes close.
Your savings bonds and mutual funds are not going to pay the rent for you. But you house will totally eliminate it. It also forces you to save money in the form of mortgage payments as you are effectively building a huge cashier in the form of equity.
You can complain about the mortgage payments now. But you will be smiling from ear to ear if ever a time comes when you cash in that fat equity check.
The global population is expanding. You don’t need to conduct deep research on the internet to come to that conclusion.
There will always be a growing demand for houses. Couple that with the limited supply of inhabitable land, there is only 1 inevitable outcome.
No matter how much extra supply is pumped into the market, real estate cycles always ensure that there will be a market for properties.
The best examples of such markets are places like the many areas within Florida and North Carolina. Internationally, just look at how properties in places like Hong Kong and Singapore are flying with no ceiling in sight.
This never ending demand is a big reason why real estate has proven to be one of the best, if not the best, category of investment vehicles for decades.
The potential of zoning changes and master plans
A lot of homeowners have experienced the elation of their houses explode in value. And it’s not because of making wise calculated decisions when they bought. It is because governments can change zoning regulations that mean a windfall for homeowners.
The publication of master plans can also pull in a lot of activity into specific areas almost by default. If the government releases a new master for area which will see it teeming with commercial activity, it’s time to thank lady luck.
You can’t predict these policy changes.
But what you can acknowledge is that there will only be more building and construction works all over the country.
It will never stop.
This means that there will always be homeowners to get lucky with zoning. You don’t even have a chance of winning if you don’t buy a ticket.
Gearing and leverage
We have previously mentioned novice investors who fail to appreciate the dynamics of real estate. But veteran investors like real estate so much because they know the leverage they can yield from property investments.
You don’t need to have $300,000 in your bank account to buy a house worth that much.
If you are prudent, you only need 20% of it as down payment to be what banks classify as a safe buyer.
If you are a real risk taker, you might even go all in and get a “no money down” loan. But I don’t recommend that as it will carry a lot of risks.
At 20% down, you are effectively using 20% of the asset value to control 100% of it’s upside. This is a key reason why many new investors are willing to take the plunge. Also note that is could be also why 2008 happened the way it did.
Profit when you buy
There will always be undervalued property in the market. The professionals like to use a lot of jargon to name them. These include fixer-uppers, below valuation property, undervalued homes, etc.
Other than that, there are always situations where owners become desperate sellers due to a need to relocate or simply liquidate.
You can always grab a bargain as long as you look hard enough. And if you are too busy to do that, hire a realtor or agent to do that job for you. The prospect of you failing to pull the trigger when finding a good buy, is higher than being unable to find one.