Are you considering investing in Real Estate but are unsure if it’s the right decision for you? As someone who has invested in property in London and the US, as well as my background in investment banking, I use this knowledge to help buyers understand the best reasons for investing in real estate and why it makes for a great investment. Here are my top 6 reasons why Real Estate can be the best investment for your goals.
Reason Number 1: Appreciation
The first reason why Real Estate is a great investment is that it appreciates – it increases in value over time. Supply and demand is the greatest driver and in most areas, there is just not enough housing for the population. Then there is inflation that drives up the cost of housing and construction costs. Given that it means that over time property prices and values has and will continue to increase.
This graph shows the overall trajectory of property prices across the UK since 1970. You can see the overall appreciation trend with London leading the way not just on average property prices but also the rate of appreciation over time.
Reason number 2: Property is Leverageable
Another reason why you should invest in real estate is that it is leverageable. This means you can get financing in the form of a mortgage to buy it. I think this factor alone makes property so unique compared to other asset classes. I honestly can’t think of any other asset where someone will lend you money to buy it, and this is because it is a physical asset and can be secured, meaning the bank can easily take it as collateral against their loan.
Now as a former banker, I can tell you that banks are not in the business of owning real estate and nor do they want to but having that security against a conservative loan to value gives them the confidence to lend against the asset, especially one that will appreciate. This leads to the next great reason to invest in property –
Reason Number 3: Real Estate Provides Shelter
At the end of the day, residential property is housing and provides shelter. It is tangible and easy to understand. You can improve it through refurbishment and other improvements, which we call “sweat equity”. This therefore not only provides a human-need, but can continue to become more valuable over time, thus improving your investment.
Reason Number 4: Property Can Generate Rental Income
Through property, you can have someone else paying your mortgage and that is by renting it out. Depending on that mortgage payment, it can provide a sizeable source of cash flow that can be used to not only pay down debt but can be saved to reinvest in other assets.
I have to note that for many London investors, cash flow and yield – which is the excess they make off the rental income compared to the cost of the investment – is less of a driving factor as they tend to be investing for the long term appreciation that London has been able to generate.
Reason Number 4: It is Tax Deductible
Depending on the jurisdiction, the interest payment on a mortgage is tax-deductible, creating another great reason to invest in property. This means all things being equal and depending on interest rates, you are actually better off buying a property with a mortgage than buying it with outright cash. There may be other deductible expenses such as maintenance repairs, wear and tear allowance and in America, you can get to a deduction for appreciation over time.
Reason Number 6: Real Estate is Stable
The last reason I want to highlight that makes real estate a great investment asset is that it is stable. Real Estate is slow to rise and slow to decline, this means you won’t have the same level of volatility as perhaps in the stock market. This is a great graph that shows the comparison of property prices relative to the FTSE 100 stock market index. Looking back since 1980, you can see that both have risen steadily, but you’ll also notice that the downward drops in the stock market have been more dramatic, and I dare say very painful over time for investors.
So I hope this article has been helpful to outline some of the reasons to make Real Estate such a great investment class. Which one stood out the most to you?