If you’re planning for retirement, or just investing with a distant time horizon in mind, you have to think about the potential long-term payoffs of your prospective investments. Whether you’re purchasing rental property, land for yourself, or commercial holdings, real estate remains one of the highest recommended long-term investments you can pursue.
But why is this the case? What makes real estate such a powerful long-term investment? Is it always a positive investment move?
The Value of Real Estate
These are just a few of the biggest reasons real estate is held in such high regard among long-term investors:
- Historic growth rates. Take a look at any chart that exhibits growth patterns in real estate over time. No matter which region you select or metrics you define, you should see a clear rate of price growth across the board and over the decades. A few periods of time have been notable for real estate pricing declines, and a handful of bubbles caused problems for investors in real property, but those have always turned out to be only temporary setbacks. If you hold your real estate for a long enough period of time, you are pretty much guaranteed to see an impressive return. Historical data can’t unerringly predict the future, but it is a solid source of information that tends to give investors confidence.
- The finite nature of real estate. Another essential fact of real estate is that it’s finite. There’s only so much land in the world, and only so much in your neighborhood. Historically, populations have risen in nearly every geographical locale area with a fairly steady growth pattern, which means there was a greater number of people demanding a share of an unchanging amount of property. The dependable growth curve results in consistently rising demand, which in turn leads to consistently rising prices. Unless a drop in population is in our future, this pattern will likely continue.
- Benefits over renting. There are some instances in which renting makes more financial sense than buying property, but for most of us, buying (and owning) is preferable. Paying rent doesn’t really do anything for you, while paying off a mortgage increases your equity in the property. For that reason alone, most people feel an incentive to buy at least one house for themselves.
- Rental income potential. If you’re interested in a more robust real estate portfolio, one of the best ways to make money in this field is by generating rental income. Owning a house, securing a tenant, and charging the tenant monthly rent could create a lucrative revenue stream for you. Assuming you have high rates of tenant retention and your property is in an area that has reasonably high demand for rentals, this is likely to pay off for you.
- Neighborhood popularity dynamics. In addition, certain neighborhoods possess a potential to benefit from explosive popularity. Areas full of creative people and/or job opportunities may enjoy sudden periods of expansion. If you own property in one of these sectors, your net worth could expand proportionally.
The Caveats
There are a few caveats to consider here, though:
- There are many different types of real estate. First, remind yourself that there are many different kinds of real estate and therefore an array of purchases you might make. Buying a home for yourself won’t be the same as purchasing a residential rental property. Both of these transactions are very different from acquiring commercial property. Differing investment strategies pose different risks and rewards, so it’s difficult to make a blanket statement for all real estate prospects.
- Different regions have disparate strengths and weaknesses. Similarly, real estate growth rates vary for different geographical locales. Some cities have seen their real estate markets collapse in the past few decades, while others have skyrocketed in value. Some of your potential for success will depend on where and when you choose to invest.
- Not all properties offer a profitable return. For a time, the practice of house flipping enjoyed immense popularity. But gradually people learned that house flipping was rarely profitable. That was because not all properties had an equal potential for a significant return. You’ll have to weigh the condition of the property, its purchase price, and its potential for your intended use.
- Historical trends do not guarantee the future. Finally, don’t forget that just because real estate prices have risen consistently over time, that doesn’t mean the pattern is guaranteed to continue forever.
Overall, real estate is usually a tremendously valuable long-term hold. But it’s not a perfect investment; nothing is.
If you want to start investing in real estate, spend some time evaluating your own risk profile, learning the basics, and working with mentors who may help you make better decisions. You should have plenty of time to work out the finer details of your investment strategy.