Why Invest in Real Estate?

31 Mar
International Finance Centre, Hong Kong

International Finance Centre, Hong Kong

Houses on promenade Real estateWarren Buffet one of the richest men in the world has some sage advice when it comes to investment

Be fearful when others are greedy and be greedy when others are fearful“.

This advice rings true for the current state of the worldwide real estate market.

There is no doubt that the crash of the real estate bubble has burned investors and banks worldwide, it is at this point however where the smart investor gets in.

Although in these times a different view should be taken on a property investment. The investment should be viewed upon its return from an income generating perspective rather than just an expectation of future capital growth. If the last couple of years have thought us anything is that world events can change investment markets in a heartbeat. So aim for properties with good returns on investment with a strong rental covenant (Long Term Tenant).

The Rule of thumb is that rental income minus costs as a percentage of the price of the investments (including taxes and fees) must be 2 -3 % above the prevailing interest rate. This gives us a good risk buffer to work with.

Top Two Reasons for Investing in Real Estate Now!

1. Safety

The rule of thumb as mentioned above would have been very difficult to achieve in the middle of the economic boom but now it is quite common to have properties yielding up to 6%. Take advantage of this but be sure to invest in areas where there is a strong rental market. As prices rise property will become a more risky asset. This is the time to invest while prices are low to give you that safety buffer than investors who are late to the market will not receive.

2. Leverage is on the way back

Although it is not at the level it was at before leverage is slowly coming back. Leverage refers to the level of debt you can receive on your investment. In order to explain this further here is a real world example.

Say you buy a piece of real estate for $100,000 and you borrow 60% of this @ 4%.

You have put down $40,000 and are due to pay back $2,400 interest to the bank per year.

You receive a 6% income on the investment = $6,000 – $2,400 (bank debt) = $3,600.

An income of $3,600 on a $40,000 investment represents a 9% return. With this simple example we can see how a little leverage can turn a 6% return in to a 9% return.

Now imagine 80% leverage, this generates a 14% return. Leverage is slowly on the way back and the more leverage in the market the more investors will come in to market pushing prices higher. Get in the market now and when banks become more leverage friendly you will have most likely have two favourable options.

1. Sell your property to an investor for substantially more than you paid.

2. Remortgage your property in order to increase your percentage return on funds invested.

These are just two of many aspects of why you should invest in the real estate market now. With people being fearful about purchasing it is your chance in snap up a bargain that produces real income in the short term and the prospect of a huge payoff in the long term.

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