Real estate investment can be a safer way to make money than investing in the stock market. During an economic downturn when property values and interest rates are both at record lows, real estate investment can also be a great way to take advantage of a market where you can find great bargains. Of course, real estate investment is not without risk, so you need to make sure you are prepared and understand what you are getting into.
There are a few reasons why real estate investment is largely considered to be a safer investment than other types of investments such as stocks. For one thing, real estate is a tangible asset that is unlikely to ever be worth nothing. It has actual value in terms of both the land and the materials that were used to build the property.
While stocks have value, it is possible for them to go to zero if a company goes bankrupt, if a company suffers great losses, or if the company was reporting incorrect financial information to the public. In other words, there are certain risks in stocks based both on the way the market works and on the different nature of the investments that causes them to have additional risks as compared to real estate.
In real estate, it is also possible to insure against anything that could cause a total loss. For instance, you can buy fire insurance or flood insurance or tornado insurance. You cannot buy insurance against your investment in a stock going bankrupt. Once again, this means that you can more fully protect yourself in real estate.
One of the clearest examples of evidence that real estate is less risky than stocks comes from the fact that banks allow you to borrow money to invest in it. If you went to a bank and asked the bank to give you money to buy stocks, or even to buy bonds or mutual funds, the bank is not going to give you a loan for those express purposes because the bank recognizes that there is too great a chance of loss. The bank will, however, lend you money to buy a home or an investment property because the bank knows that the asset is always going to have some value to guarantee the loan.
The fact that the bank lends you the money also gives you more leverage to make larger investments. You`ll be getting the opportunity to invest with other people`s money – the bank`s – but you get to keep all the profits when the property goes up in value. This reduces the amount of risk you are actually taking in order to earn rewards and also reduces the amount of cash you have to tie up in the investment.
If you want to invest in real estate and take advantage of these benefits, as well as of the opportunities that exist in the down market, it is important to educate yourself. You need to know what gives a property a good value and what makes it a bad one. Location plays a major role in this, so pay attention to up-and-coming areas or areas where property values appear to be on the upswing instead of stagnant or moving downward. A look at comparable sales as well as rental rates and the amount of months it would take to sell all current properties in a given market are all useful metrics used by real estate investors.
Finally, make sure you don`t get in over your head financially. Use a mortgage calculator to find out what you will owe each month and make sure you can pay it back. Don`t count on rental income or low teaser rates when making this decision either or you can get into financial trouble.
