What is Real Estate?
There are many forms of real estate investing each with different levels, and types of risk, the most common of which is purchasing a house with the intent to rent it out for regular cash flows as its value appreciates. There are also other forms of real estate investing such as Real Estate Investing Trusts (REITs) which are generally exchange-traded and offer a definite advantage over tradition real estate investing of requiring a much smaller initial investment. The disadvantage of this structure is that fees will be higher, and your returns are not assisted by leverage.
What Are the Expected Returns of Real Estate investing?
The expected returns of real estate will differ depending on the type of real estate investing you take part in. Over the past 25 years, Australian housing prices have increased a touch under 7% per year on average. If you’re investing in REITs, you can probably expect similar numbers going forward before fees however it’s important to remember that Australian real estate has been on the rise for the better part of 40 years. That trend won’t go on forever, longer-term I think you will see that 7% fall to potentially 4-5%. Based on this you may ask why anybody would invest in property over shares which have returned around 13% over the past 120 years? The critical difference between the two is that investing in housing offers everyday investors a chance to leverage their investments. If you provide a 20% deposit when buying a house you are using the bank’s money to finance 80% of your home, this means your cash on cash returns are substantially higher than the 7% stated above.
What Are the Risks of Real Estate Investing?
As with any investment, there is always the possibility that housing prices will decrease in the short-term. The more significant risks of real estate investing are the leverage used and the size of the investment. With typical deposits being 20% of the value of the house (or less) and the price of housing being a more substantial portion of household expenses than ever before the risks of homeownership are higher than you might think. With interest rates steadily declining over the past 10 years, borrowing has become cheaper, and home pricing has increased substantially. Still, if unemployment or rates are to rise in the coming 10 years, there’s every chance we’ll find out that some people are over-levered and housing prices may decline.
Is Real Estate Investing The Best Allocation of Your Money?
As mentioned, the returns from real estate can be fantastic with the help of leverage, but it also provides an equal dose of risk. In most cases, a property will account for the majority of an individual’s portfolio, which can be incredibly dangerous. As part of a balanced portfolio real estate investing will make a welcomed addition but I would be cautious in saving all of your money to invest in a house. It’s a risky approach that has worked well over the past 30 years I Australia as rates have declined, but with no more room to move down, it’s hard to see that trend continuing. If investing in a REIT, you can more easily manage the portion of your portfolio that is invested in property, making it a great way to diversify existing holdings in other areas.
What Does Real Estate Offer That Other Investments Don’t?
The main advantage that you get from real estate investing that the everyday investor doesn’t get from other investments is leverage. Borrowing 80% of the investment makes achieving a fantastic rate of return possible over the long run. This is not an advantage of investing in a REIT, but REITs have don’t require a substantial deposit.
How Can You Invest in Real Estate?
This will depend on what type of real estate you want to invest in, REITs can be invested in with the help of an everyday brokerage house. Buying a home will involve a bit more work but can easily be achieved with the help of a bank or mortgage broker.