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Real Estate

Renting or buying? It’s the never ending conversation among Real Estate gurus who just can’t find an agreement. All we can say is, it depends.

Real Estate counts as one of the most lucrative investments in the world. Investors like Grant Cardone, Ryan Serhant, or Dave Ramsey are all stellar examples that investing in real estate can be the way to go. Let’s look at some reasons why investing in real estate is so attractive to investors worldwide.

What makes Real Estate so attractive?

Just like businesses, Real Estate has the potential to appreciate over time, meaning the value of the property may increase, allowing investors to sell at a higher price than they initially paid for. 

Other perks include:

  • Generating rental income by leasing properties to tenants (potential for cash flow that serves as passive source of income)
  • Valuable addition to existing investment portfolios, providing diversification
  • Real estate’s performance may not always correlate with the stock market, offering a buffer against market volatility
  • Real estate is often considered an inflation hedge since property values and rental income tend to increase during inflationary periods, helping to preserve purchasing power
  • Tax benefits
 
The list goes on but that should give you an idea.
Types of Real Estate
  • Residential Real Estate – Single-family homes | Apartments & Condos | Townhouses | Co-operative housing
 
  • Commercial Real Estate – Office buildings | Retail spaces | Industrial buildings | Hotels and Hospitality
 
  • Agricultural Real Estate – Farmland | Ranches | Orchards | Plantations.
 
  • Special Purpose Real Estate – Educational buildings | Healthcare facilities | Religious buildings | Government properties 
 
  • Mixed-Use Real Estate – Combined types of real estate uses within the same development or building.

  • Vacant LandLand that is undeveloped and has no structures on it (usually designated for future projects).

Who invests in Real Estate?

There is no limit as to who invests in Real Estate. Really anyone with sufficient funds or access to financing can invest in Real Estate. These are the most common:

Most common participants in Real Estate Investment.

These guys specialize in acquiring land and building new properties or renovating existing ones. They often focus on large-scale projects, such as residential communities, office complexes, or retail centers.

Real Estate Investment Trusts own, operate, or finance income-generating real estate. They pool funds from multiple investors and invest in a diverse portfolio of properties. REITs are publicly traded on stock exchanges, providing individuals with an opportunity to invest in real estate indirectly.

Those can be pension funds, insurance companies, and private equity firms, that often allocate a portion of their portfolios to real estate investments.

Private Equity Funds are firms that pool capital from outside investors, which is then used to acquire and develop properties for a short period of time before selling them.

Those platforms allow individual investors to pool their money with others to invest in real estate projects. This approach makes real estate investing more accessible to a broader range of people.

Real Estate Syndicates are groups of investors who pool their resources to invest in a property. This cooperative approach allows individuals to participate in larger, more expensive projects than they could afford individually.

Non-residents or foreign investors can also invest in real estate in many countries, subject to specific regulations and legal requirements.

Talk finance

The majority of investors use debt to leverage their properties. Leverage in real estate refers to the use of borrowed money. What that means is that an investor makes a downpayment to acquire a piece of property, and takes out a mortgage loan for the remainder. The goal is to get tenants pay off the mortgage, while the investor accumulates positive cash flow AND have the property appreciate in value, whether that’s through time, or increase in rent, or both. While tenants pay off the loan, the investor gets all the equity in the property. We like this video by Grant Cardone as it’s a great example of leveraging deals.

Some more terms to know

Credit scores measure the likelihood of individuals to pay their bills on time. If a person carries balances on their credit card or has a lot of late payments, that may negatively impact their credit score. The higher the score the better the chances of getting the lowest rates. According to the Federal National Mortgage Association (Fannie Mae), credit scores of >780 qualify for  the lowest rates. The minimum score for Fannie Mae loans is 620. Talk to your bank advisor or lender about your credit score to avoid higher rates at the end.

Escrow accounts are typically used as an extra layer of security to the transaction, reducing the risk of fraud or non-delivery. Those accounts may hold monthly associated costs with home ownership such as taxes, PMI, or other premiums. When people talk about a property being in escrow, they usually mean that predetermined conditions are satisfied, and the transaction can move forward. 

Interest rates are the percentage rates charged by lenders to borrowers for the use of borrowed money. Lower rates result it lower monthly mortgage payments, which can stimulate demand and drive up home prices. As interest rates increase, the cost of borrowing goes up, resulting in higher monthly mortgage payments. It’s always a good idea to consult with a mortgage institution or advisor how rates apply to you. Depending on the duration of a loan, interest rates will vary. According to bankrate.com, the national average for a 30-year fixed mortgage interest rate is at 7.2%, as of July 24’23.

Sometimes, a home and the land it’s on don’t come together, which means that tenants will pay rent to the landowner for the land, separate from the home itself.

This document is provided by a lender or a financial institution to a potential borrower. It states that the lender has reviewed the borrower’s financial information and creditworthiness and is willing to provide a mortgage loan up to a certain amount. Getting pre-approved for a mortgage is an essential step in the homebuying process, as it can give you a competitive advantage when making an offer on a property.

Principal, Interest, Taxes, and Insurance are payments you’ll make on a mortgage loan. Lenders estimate PITI for you before determining whether you qualify for a mortgage. It’s important for homeowners to budget for PITI payments properly to ensure they can comfortably afford their homes and avoid any potential financial issues. 

Private Mortgage Insurance is a type of insurance that lenders require from borrowers when they are obtaining a mortgage loan and making a down payment that is less than 20% of the home’s purchase price. PMI protects the lender in case the borrower defaults on the loan. Your PMI depends on your personal situation like credit score, loan term, loan size, and more. Once the borrower’s equity in the home reaches 20% (through a combination of regular mortgage payments and home value appreciation), they can request the removal of PMI from their mortgage payments. This is known as PMI cancellation. Always consult with your lender or a financial advisor to get a clear understanding of the specific PMI requirements and options in your situation and ask for refinancing options.

Realtors are licensed Real Estate professionals who are members of the National Association of Realtors (NAR) in the United States. Not all real estate agents are Realtors, but all Realtors are real estate agents. They are licensed to facilitate Real Estate transactions, representing buyers, sellers, or both in the process of buying or selling properties. They typically earn a commission on real estate transactions, which is a percentage of the property’s sale price. This commission is usually split between the buyer’s agent and the seller’s agent (Oftentimes 3-7% of the purchase price).Though you don’t have to have a realtor at hand to purchase or sell a home, it may be beneficial due to their expertise, market knowledge, and commitment to ethical practices.

Stocks vs. Real Estate

Similarities

Differences

  • Both have the potential to be lucrative investment vehicles (can also not work out in your favor).
  • Opportunity for long-term investments.
  • Can be accessed through online markets (REITs are a way to access the Real Estate market through an online exchange).
  • Both present ownership of an asset.
  • Prices change daily depending on current economic and other factors.
  • Real estate investments are tangible assets (physical properties that can be seen and visited). Stocks are intangible assets, represented by electronic or paper certificates. 
  • Real property is usually a long-term investment while stocks are oftentimes preferred as short-term investments
  • Some stocks pay dividends, which are a portion of the company’s profits distributed to shareholders. Not all stocks pay dividends, and dividend amounts can vary. Real estate provides the opportunity for regular income generation through rental payments.
  • Real Estate prices tend to be less volatile than stock prices.

Disclaimer: This content is for informational purposes only and is not intended as financial advice. We try to provide accurate information on personal finance and investing, but it may not apply directly to your individual situation. We are not financial advisors and we recommend you consult with a financial professional before making any serious financial decisions. There are risks associated with any investment which include but are not limited to stocks, bonds, currencies, cryptocurrencies, as well as any other market or investment vehicle. For more Terms, click here.