Investing in real estate has always been regarded as an expensive and risky venture. However, for those who are looking to create generational wealth, it is viewed as the least expensive and risky venture. Logically speaking, a reward requires risk. In the case of Real Estate Investing, the short term investments are risky and long term investments are viewed as relatively safe in comparison.
The true power of Real Estate Investing comes when you are able to increase the value of a property while simutenously generating consistant cash flow. This is what allows you to increase your equity [ownership] in an investment property, essentially creating a scenario where a property can pay for itself.
But, of course, investing in real estate isn’t as easy as it sounds. In the same context, investing in real estate isn’t as difficult as you might think! Let me elaborate further. Let’s say you build a new multi-family property with the intention of renting out the units. Well, building an apartment building really can be looked at as an easy 3-step process when you view it in a broad sense.
- Buy Land
- Secure Funding
- Hire a construction company to build the property.
However, there are smaller steps before, in between, and after those three broad steps. Among these smaller steps include:
- Consult with a realtor to find out zoning laws.
- Compare and contrast different properties to ensure you get the best deal on the best possible property at that point in time.
- Do market research to find out what similar apartment units are renting for in each area.
- Learn what the local laws are regarding possible rent control.
- Account for amenities, recreation, parking, etc.
The above scenario is meant for investors who are looking to develop a property by constructing a new apartment building. However, I recommend keeping in mind that there are several ways to invest in Real Estate. Another way to invest could be as simple as partnering with a Real Estate Development Firm, such as Murcia Group.
But, why would you partner with a Real Estate Development Firm rather than constructing a property and claiming all profits all by yourself? Here are some reasons you may consider it!
- Managed Risk of assets. You can spread your investment across multiple properties, reducing your up-front investment and risk. No successful investor that I know would recommend that you put all of your golden eggs in one basket when it comes to long term investing.
- Experienced Team. It will require many more hours of research and education for a single person to undertake. Yes, you could build a team and seek out consultants yourself, however, you will still not have the experience of trial and error on your side by multiple professionals. Each professional in a firm brings with them years of experience in a highly focused area of Real Estate.
- Low Barrier of Entry. Investing could be your job, however, real estate development may not be your profession. The most successful investors start out by investing earned income from their profession, which is usually outside of the real estate industry. For example, you may invest in a company’s stock, it could be a car company, but you aren’t the one there actually building cars. A Real Estate Development Firm has a financial incentive to do its job well, and make the investment worth it to the investor in the way of return on investment.
Now that we have some background information on the desired mindset of a Real Estate Investor, its time to talk about “Why should you invest in real estate at all?”. The single most convincing reason to invest in real estate, in my opinion, is based on the phenomenon that real estate property increases in value over time.
What Causes Property Value to Increase Over Time?
There are multiple factors that can contribute to an increase in the value of any given real estate property. This is true for both residential and commercial property. Here are three factors that can cause real estate to increase in value over time.
Supply and Demand
Since the beginning of mankind, people have the tendency to bare offspring. When new children are born, this increases the population. In the USA, adults are more likely to leave their parent’s homes to purchase or rent a home to start their own family. This one act alone causes an increase in demand. When you take into account that the average number of children per household is more than 1 child, you begin to see population growth and this is great news for real estate investors. You can assume that at any point in time there will be more people looking to buy a home than there are homes to buy. When there is a greater demand than there is supply, property value increases. In that same sense, when there is greater supply, you will see property value decrease. This decrease in price is a natural reaction by sellers to compete with other sellers in order to sell a property.
Inflation
In reference to supply & demand, inflation plays a huge part in how much disposable income available to be spent on property. For the most part, inflation is driven by the increase in demand of people to spend money. However, the government also prints money to stimulate the economy every year. When new money is printed, although not immediately, the value of each dollar decreases. But, what does this mean for real estate investors? In short, it can mean that by purchasing property sooner your property value increases with inflation. A simple example of inflation would be milk and egg prices. In 1950, a gallon of milk was $0.85, but today its $3.25. And, eggs were $0.60 in 1950, now in 2020 eggs cost about $1-$3 per dozen. The same thing happens with property value!
Renovation
Renovation is where we see some of the highest short-term increases in real estate property. Renovation can happen on a per home level, a per neighborhood level, and a per district level – even. It is no secret that the US population can be viewed from three different perspectives. Lower class, Middle Class, and Upper Class. When a lower class neighborhood receives renovation, you will see an increase in commercial and residential real estate prices in that neighborhood. But, when an upper class neighborhood becomes a middle class neighborhood, you will see a decrease in property value.
The factors that determine what will cause district-wide renovations are beyond the scope of this article. But, in short, it can be summed up to local government policy, funding, availability and quality of jobs and schools, and many more factors.
So, should you invest? Yes or No?
Yes, you should invest in real estate if you’re looking to retain the value of your hard-earned dollars. Real estate investing beats having large savings because your money works for you when you invest, whereas your money is almost guaranteed to decrease in value over time if you keep cold-hard cash. If you’re looking to reduce risk and set yourself up for retirement in addition to creating generational wealth, reach out to us! We’re happy to elaborate further!