Purchasing real estate is probably the biggest investment one ever has to make, however, if done right can be extremely rewarding. Real estate not just serves as a house or place for economic activity; it can also generate substantial capital gains. Here are 5 reasons why you purchase your own property as soon as possible.
1. Real Estate Is a Physical Home
You should always buy your own home as the first investment in real estate. Your home is a source of pride and envy of others. You would take utmost care in designing and making modifications to your home. Since it is your own house, you would also be able to undertake large renovations without concern that you are adding value to somebody else’s property. Even if you are staying with your parents right now, you should always do the groundwork and prepare for the day you would move out and get your own residence. For those getting married and looking to start a family, buying a home should be a priority. The house is a physical asset and serves a practical purpose. As such a house will always have a value no matter what.
2. Housing Loans Provides Leverage at Low Cost
Only a housing loan can provide for up to 90% of the property value. The reason is simple; banks are comfortable with the long term value of properties and thus can give a high margin loan at very affordable interest rates. Also, few people can purchase a house outright; they would most definitely need to get a housing loan. The housing loan serves as a leverage to amplify the returns of both rental and capital appreciation on capital invested. For example, if you bought a house of $300k with 10% down payment and the property appreciates by 10%, you have already made a 100% return on your investment! ($30k increase based on $30k down payment). The housing loan rates are also the cheapest form of financing one can find as compared to car loans, credit cards loans etc. Why not make use of the bank’s money and willingness to lend to build your assets?
3. A House Serves As a Hedge against Inflation
Housing values will appreciate in the long term. In fact, houses typically double in price every 10 years or less. The reason for the continuous appreciation is that houses are well-known as an excellent hedge against inflation. As the supply of land gets reduced due to continuous development and demand for houses increase due to rising population, houses will increase in value. This is particularly true for bustling cities such as New York City, London and Tokyo etc. Another reason is rising labour costs and raw material costs, which will also push property prices up as the replacement value for the house becomes higher. This is however only applicable to the long term as in the short term; housing prices can fluctuate greatly due to many reasons like economic uncertainty, oversupply of houses, consumer confidence etc. Unlike investments in stocks and businesses, a property cannot become zero in value. Properties are physical assets which sit on land and land cannot be manufactured. Stocks and businesses however, can become bankrupt and the real risk of losing everything is there. While there may be short term fluctuations in value, the long term potential of property is always upwards as described above.
4. A House Forces You To Save
If you do not possess a home, you would have to rent from a landlord. Giving your hard earned money to the landlord every month as rental would just make the landlord richer and you poorer. Why not pay yourself first? You should instead buy a home and pay yourself rent for staying in the house. By paying instalment for a housing loan as compared to paying rental, you will be saving a lot of money. One, you will save money on the difference between the instalment and the rental; rental is usually higher than instalment. Two, you will save money on the principal portion of the instalment as that money goes towards reducing your loan instead. The only real costs for owning a home are the interest charges on your bank loan and the opportunity cost loss that the money could generated from other investments. However, you will be hard pressed to find another asset which can yield returns as high as real estate. As such the house serves as a store of your savings, forcing you to save a certain percentage of your income every month. The capital appreciation of the property and the decline of loan balance will increase your net asset values faster than you can imagine.
5. Rental for Passive Income
If you already own a house, should you purchase another? Assuming you have the savings and the sufficient excess income to pay the instalments for another house, you should definitely consider. You can then rent out the house and become a landlord! It just takes a bit of work to furnish the house, find a tenant and manage the tenant. It is Passive Income as you do not have to do much and the rental comes in every month. The tenants will now work for you as they are paying you rental to make you richer. If you took out a loan for 20 years and you manage to get a tenant to pay your instalment for you, the house becomes yours for free in 20 years! Furthermore, if you manage to secure a rental rate above your monthly instalment, you also get positive cash from your house. Now you know why landlords are so rich!
Drawbacks to Real Estate
If real estate investments are so rewarding, why not just keep buying real estate to boost your returns? However, take note that since Real Estate is a leveraged investment, the leverage can either amplify your returns or amplify your losses. Also, in the short term, real estate will go through fluctuations of over valuations and under valuations, buying at the wrong time could result in long term damage to your financial health. It is also wise to exercise prudent financial management and not overstretch yourself in commitments and over leverage.
By staying conservative, real estate investment will almost definitely make good returns for you!