Why You Need to Add Real Estate to Your Investment Portfolio
Ever wonder what the most successful investors are doing that generate great long-term growth?
Ever wonder what the most successful investors are doing that generate great long-term growth? The truth is there is no secret, they are simply investing in a diverse selection of investment vehicles. The problem with most investors portfolios is that it is missing one of the most profitable asset classes: Real Estate.
What are the advantages to adding real estate to your investment portfolio? What is the best way to create wealth using real estate? And how do you take advantage of properly using leverage to increase your returns? Here’s a quick breakdown of the answers to these common questions, and why anyone can start investing in real estate successfully.
Diversify Your Portfolio by Adding Real Estate Investments
The most successful investment portfolios are portfolios that are properly diversified, and that includes investing in real estate. The logic behind keeping a diversified investment portfolio lies in the fact that the markets react differently to different economic changes. While one investment may be slightly underperforming, your other investments may be soaring, offsetting the potential downturns of the underperforming investments. This is called a diversified portfolio.
Including real estate in your investments allows you to increase the diversity of your investment portfolio. Real estate, however, is perhaps one of the most unique investments that present an exciting opportunity to generate a reliable stream of income, if structured properly. Here’s how…
How to Create Wealth Through Real Estate Investing
What if there was an investment vehicle where you could invest your friend’s money, and you keep all the returns? Imagine that you were able to take out a bank loan for $20,000 at a 4% interest rate with a 6-year repayment term. Your monthly payment would approximately be about $312 per month. You then invest the $20,000 in an investment that pays you $650 per month. This allows you to pay back the $312 loan payment and pocket the rest. Would you see that as an investment opportunity worth perusing? Absolutely!
Take the above example and apply it to a much larger scale, and you’ve just been introduced to the benefits of successful real estate investing. Allow the following example to explain the process:
John is a single adult looking to create and grow his wealth. He decides to begin investing in real estate. John obtains a mortgage loan from his local bank after he finds a great deal on a home in a close by neighborhood. The purchase price is $200,000, and he obtains a mortgage for $160,000 at a 4% interest rate and a 30-year term, making his monthly payment about $764 per month.
After closing on his home, John lists the newly purchased home for rent, and finds a great family who agrees to rent the home for $1300 per month. After paying the mortgage payment along with taxes and insurance (estimated at about an additional $100 per month), John pockets about $436 per month ($1,300 – $764 mortgage payment – $100 taxes and insurance = $436).
In other words, John’s initial $40,000 investment (the amount he paid for the down payment on his mortgage) is generating him about $5,232 ($436 x 12 months = $5,232) per year which is an investment return of just over 13%!
Using “Leverage” to Grow Your Wealth
Leverage is a term used by investors when an investor uses other people’s (usually a bank or a loan from a private investor) money to generate an investment return. From the above example, John only used $40,000 of his own money and $160,000 of the banks money to generate great investment return.
On a more literal level, a lever is used to lift heavier objects then you or I have strength to lift. We could use a metal rod as a lever to wedge under a very heavy rock and create a lever to lift something much heavier than we otherwise would have had strength to do. The same principle applies when you use leverage to invest.
Using leverage properly for an investment such as real estate, must always be combined with the proper analysis of your investment that will be leveraged. By analyzing the price of the home that you wish to purchase, doing research on how much you could rent it out for, and researching how much your mortgage payment is, you can determine if your investment is worth leveraging.
But what if you don’t have a down payment for a mortgage? Can you still invest in real estate? I’m glad you asked…
How Anyone Can Invest in Real Estate
Perhaps the biggest reason consumers don’t begin investing in real estate is because they don’t have a large enough down payment to get a mortgage for an investment property. Most banks require about 20% of the purchase price as a down payment if it is to be an investment property. Here are two ways you can take advantage of real estate investing to get started if you don’t have the down payment for a mortgage:
1. Can’t buy the property as a rental? Then purchase it for yourself! Home purchases that are considered to be your “primary residence” only require a 3-5% down payment in most cases. This gives you a starting point to begin building equity in a home. Once you lived in it for at least a year, you can then move out and turn it into a rental. And the great thing is, you can show the bank that you have rental income that covers the mortgage payment, allowing you to then purchase another home and use it as your primary residence while your first home is now being rented out!
2. Not able to purchase a home due to other financial situations? Thanks to modern technology, investing in real estate is now available on “peer to peer” lending platforms such as Fundrise. Peer to peer lending companies gather a pool of investors and combine their investment contributions to one big lump sum, which is then used to purchase a real estate investment. In other words, companies such as Fundrise allow you to take advantage of the great real estate investment returns on a much smaller initial investment requirement, usually starting with a minimum investment of just $500.
Real Estate Is A Vital Ingredient to A Successful Investment Portfolio
Do you see the benefits of investing in real estate? The ability to use leverage, aka “other people’s money”, allows you to reap the returns of a much larger investment. Thanks to modern technology and properly structured home purchases, there is no excuse to not include real estate in your investment portfolio.