Most young professionals these days will agree they don’t have a lot of extra time in their lives. While trying to manage work, everyday activities, fit in some sort of social life, and everything else life throws your way, it’s easy to overlook things like investment options and planning for retirement. Today, I want to introduce you to an investment option which has proven over and over again that it is the best way to create wealth and won’t give you an extra full time job: investing in real estate. The term real estate is pretty broad, so this article is going to serve as an introduction guide to the topic. I’ll cover what investing in real estate is, why it’s a good idea, how to get started even if you have no time, and more.
So what exactly does investing in real estate mean? When most people think of real estate as an investment, they may think of a landlord owning a property and renting it out to a group of students or young professionals. Chances are you were a tenant at some point helping a landlord pay down their mortgage. The rent that you paid went to cover all of the monthly expenses for the property such as the mortgage, property taxes, utilities, and maintenance fees if it was a condo. If the investment is done right, there should be at least a few hundred dollars left every month that goes to the landlord. While you won’t get wealthy making an extra few hundred dollars a month, when you keep the property over a number of years, the tenants help pay down the balance of the mortgage; the rent increases every year and the house value goes up. Before you know it, that few hundred turns into a thousand a month and the value of the house went up an extra $50,000-$100,000. You can now use this money to purchase another property and repeat the steps.
If that sounds like a lot of time and work, there are other ways to invest that are completely hands off. An example of this is a product called a Mortgage Syndication. The easiest way to explain what a Mortgage Syndication is, is through example. A real estate developer comes to you and says they want to construct a building on a piece of land. If you lend them the money, they will pay you 12% a year. You’re thinking this sounds pretty great until the developer tells you he needs a million dollars. While most people aren’t able to come up with this kind of money, a Mortgage Syndication splits the million dollars into smaller amounts. Now multiple investors can come in with $25,000, $50,000, or more and help build up a sum of a million dollars and make that great return at the same time.
These are just two different examples of the many different options when it comes to real estate investing. There’s still the question, “Why invest in real estate?” What makes is better than stocks and mutual funds? For the last number of years, most people’s investment portfolios have been on a bit of a roller coaster ride. Positive news one quarter helps increase the price and negative rumours the next makes it all come back down to where you started. Add in fees that you have to pay every year to own certain funds, and people are beginning to question if this is the best method to invest savings and build wealth. Below are just a few reasons why investors are looking to real estate to help get their portfolios back on track.
Investing in real estate means that you actually own part or all of a physical asset. Historically, enough bad news and rumours have been enough to drive a stock or mutual fund way down in value. One of the better examples of this is Nortel, which went from almost $125 to being worth just 67 cents in less than two years. While real estate can have its ups and downs, there is very little chance that there will be a dramatic loss in value similar to the above example. The value of real estate doesn’t fluctuate as much as the stock market and its economic cycles are generally longer in length, which gives investors more stability and confidence.
Another great advantage to certain real estate investments is the fixed returns. While you may not be able to tell the exact amount a home will go up in value each year, there are investments out there that offer a great rate of return (between 8-12% per year), which don’t carry a lot of risk and offer a consistent payout each month. Most of the time, there aren’t any annual fees to pay either, meaning that all of your money goes to work for you. As a young professional, knowing what you’re going to earn every month and not paying annual fees helps make future financial planning much easier and makes retirement seem that much more attainable.
Other advantages of owning real estate can be: having tenants pay a mortgage for you, being able to increase the value of the property through renovations and upgrades, and having the ability to partner up with highly experienced developers to share in the profits of their projects. As an investor, you get to choose how hands-on or hands-off you would like to be.
If real estate investing is something you think you may be interested in, the first thing you should do is get educated. There are multiple groups, such as REICO and REIN, which meet up usually once a month and are a goldmine of information to any young professional looking to learn the ropes and meet other like-minded people. When invested properly, real estate can be a great way to diversify your current portfolio or help boost returns if some of your other investments haven’t been performing to your satisfaction. Get educated, find a great mentor, and once you invest, enjoy those great returns.
Article by MP Private Capital Founder Mitch Parker