Real estate is one of the biggest financial markets. No wonder, as people need a place to live and work. Homeownership is also by many seen as the pinnacle of freedom, as you don’t have a landlord dictating rules anymore.
In this article, we’ll look at 5 major reasons to invest in real estate, and what benefits it holds over other asset classes. Let’s get started!
Real estate investing benefits
There are a plethora of good reasons to invest in real estate, and you could make an extensive list of them. But for this article we want to focus on the 5 reasons we deem most interesting.
Generate cash flow
One of the biggest benefits when investing in real estate is that you’re able to generate cash flow. If you buy a unit, whether that’s an apartment, a house or a commercial property, you can rent it out and get rental income.
Don’t just look at the cash flow, however, but look at the net cash flow. When buying real estate and financing it, you also have the debt repayment, interest payments, repairs, and other cost factors.
Being cash flow positive means you can pay for all these and still have money left over from the rental income. This is for many the ultimate goal when investing in real estate.
High returns on equity
A lot of real estate purchases are financed by a bank, with different equity ratios. In essence, this allows you to invest money you don’t own to gain higher rewards.
- You buy a house worth 200,000 EUR in cash, and get 600 EUR / month in rent. This would be 7200 EUR a year, or a return of 3.6%.
- You buy a house worth 200,000 EUR, but only put down 10% (20,000 EUR) as a down payment. The monthly rent is 600 EUR, which makes the yearly rent 7200 EUR. The return rate would be 36%.
Of course, this is a simplified calculation, as when buying a house you also have closing costs for the realtor, lawyer, etc. Also, the rate for the down payment can vary greatly.
Nevertheless, it illustrates how real estate investing can boost the return on equity because you can use the banks’ money to invest.
Buying real estate as an investment can not just be profitable in and of itself, but also allow you to write off certain things against your tax bill, which in turn provides additional savings.
Many countries allow you to write off things such as repair and renovation costs or loan fees, albeit just to an extent. If you have a high tax bill (and an expensive property), these write-offs can essentially mean thousands of Euros saved every year.
Renting out a property is optional. If it’s vacant, and you’re able to find good tenants, then the pros usually outweigh the cons, but if the house is your primary residence, then renting out is not an option.
Either way, real estate investing has another benefit, that you can also benefit from appreciation. In layman’s terms, this means that the value of your house increases, be it due to inflation, higher market demand, lower interest rates, the location being in a popular area of your city.
To find out the appreciation for Germany, for example, you can take a look at the house price index. Statista shows that from Q1 2016 to Q1 2022 the house price index increased from 103.9 to 161.9, which means there has been an appreciation of 58% in this 6-year period.
While appreciation doesn’t apply the same to properties countrywide (e.g., capitals such as New York or Berlin usually have higher appreciation rates than rural areas), it’s a non-negligible factor when evaluating your real estate investment.
An often not thought-about benefit of investing in real estate is that it forces you to save. When you take up a loan with your bank, they own the house until you’ve paid your debt back fully.
If you fail to do so, they can and will auction off the house and might also go after your other valuables. As no one wants to have that happen, they pay their rates on time.
We all know how hard it can be at times to put some money aside. Life comes in between and the money you were meant to save has got to be used to repair the car, buy a new washing machine, or, by all means, go on vacation with.
With your monthly loan repayment, you can’t and won’t skip on it because it’s at the utmost important that you pay it on time. This forced saving is actually a big positive for many people who would else struggle to put money aside for themselves.
Alternative way to invest into real estate
Apart from buying a property or land, there are other ways you can invest in real estate. These include:
- Real estate investment trusts (REITs)
- ETFs for real estate companies
- Peer-to-Peer (P2P) lending with a focus on real estate loans
With P2P lending, you are nowadays often investing in loans from loan originators, who already issued the loans, and you get a fixed return rate. Depending on the loan, this can be up to 15% or more.
On Lendermarket we have the loan originator Credory, who provides commercial loans to small and medium enterprises in Estonia which are collateralized with real estate.
The average interest rate they offer for their P2P loans on Lendermarket is 8.4% and all loans are covered by a buyback guarantee, meaning if the borrower defaults, Credory will pay you back your principal plus outstanding interest.
Investing in real estate is a well-known investment form, mainly because there are many homeowners all over the world. It offers many benefits, such as being able to achieve higher return on equity with the money from the bank, providing cash flow or forcing you to save.
And you don’t even have to buy your own real estate to invest in the real estate market. There are options such as P2P loans on Lendermarket provided by Credory, which make it possible to invest as little as 10 EUR and gain 8%+ annually.