Owning real property is a goal for many investors. When done correctly, investing in real estate can offer several benefits for individuals, including the ability to diversify income streams and capture long-term capital appreciation.
However, there are several ways investors get it wrong regarding real estate, and the costs can be pretty high. As you consider whether investing in real property is right for you, keep these critical considerations in mind.
- Consider real estate as a diversification tool. One of the benefits of owning real property in addition to traditional investments like stocks and bonds is the diversification it can provide to your income and asset holdings. The real estate market isn’t directly correlated with the stock market, so holding both types of assets can be a good thing. Having multiple sources of income helps reduce the impact on your finances should one stream dry up.
- Real estate is unique because it requires a lot of cash upfront (down payments more significant than 20 percent are common) and ongoing cash reserves to maintain and cover ordinary expenses, but the investment self is highly illiquid. Unlike a traditional investment where you can sell off some of your stocks as needed to raise a lump sum, you cannot sell a room in your property. So if you’re holding too much excess cash and have a large monthly surplus, an investment property can be one way to put those funds to work for you.
- Investing in real estate is attractive to many individuals who like the idea of having a tangible asset with passive income potential. As an individual investor, it can be challenging to find properties with sufficient cash flow potential to justify the risk and opportunity cost, especially as many professionals with a whole infrastructure behind them are trying to do the same thing. Landlords may expose themselves to financial and legal risks if they don’t comply with housing discrimination laws, proper escrow procedures, building codes, etc.
- If you are looking for a house, I’m sure you’ve been told to write a love letter to the sellers to put a face on your offer and help it stand out. Personally, as a seller with lots of great offers on the table, I didn’t read any of the letters we received because with that much play money, allowing anyone to tug my heartstrings felt irresponsible.
- If you are looking at comps from last summer and thinking, “This house is overpriced by $40,000,” allow me to respectfully suggest you aren’t ready to participate in this market. This house is worth more than it was last year, and it’s probably worth more than it will be five years from now, simply because people need homes, and there aren’t enough to go around.
- A standard model should include provisions such as the cost of capital, expected vacancy rate, taxes, and a discount rate, which is your required return rate for the investment. Cash flow modeling is critical before making a purchase, as real estate investing carries more risk than traditional investments.
This article was written after getting inspiration from a real estate company that got mentioned in Forbes for the success and best etiquettes of business. The successful company is Nomad Capital. It is known as Nomad Residences, a Portugal-based real estate investment, promotion, and development company.
With the mission to envision and develop the ultimate living experiences, Nomad Capital has the vision to create projects inspired by the world, consistently fulfilling the needs of a nomadic lifestyle.
Its values define what they believe in: Think deeply and go beyond. Act responsibly and effectively. Be dedicated and kind. Inspire and respect your team. Make yourself and us proud. Cherish and be cherished. Be an honor, NOMAD.