Building Wealth Through Real EstateSunday, May 16, 2021
Buying stocks isn't the only option available to women interested in building wealth. Depending on your long- and short-term goals, as well as your threshold for risk, an option you can consider is investing in real estate. It's not simply an option for men.
Define your financial goals
What is your definition of wealth? Are you someone who is interested in building a solid investment portfolio for financial security that will see you comfortably through your retirement years? Or do you simply want to have a steady cash flow that will generate additional monthly income? Either way, the good news is real estate investment is definitely an option you can consider to meet your goals.
What's your appetite for risk?
So you're contemplating investing in real estate, which, historically, has proven to be very stable, with properties generally tending to appreciate in value due to inflation and demand. The key word of course being “generally”. Do your due diligence about the outlook for the area the property is located in before making any decision.
As with all investments you will need to assess your risk tolerance, current diversity of your portfolio and tenure risk. Real estate, as in buying the physical asset rather than a real estate fund or stock that has real estate exposure, should typically be viewed as a long-term investment. Hence, if you cannot hold on to the asset for a longer tenor, then you might want to look at any of the other aforementioned avenues of gaining exposure to real estate.
All real estate is not equal and the market can fluctuate widely. Today it's all about residential property in a particular area code, and tomorrow commercial real estate provides the greatest opportunity for gains. Whilst it is true that this type of investing can be daunting because of the initial capital outlay, the fact is there are many different types of real estate investment options; some are riskier than others. As with all investments understanding your risk tolerance level is key; this includes your ability to withstand market shock.
Let's examine a few of the options available to you, one high-risk, and three lower-risk.
• Flipping: With the rising popularity of TV shows about house flipping, investors with higher start-up capital and a higher appetite for risk are seeing this as an extremely lucrative option. Flipping entails buying low and selling high. Purchase a house that isn't in the best condition in a good neighbourhood. Typically buy the worst house in the best neighbourhood, then put in the sweat equity to renovate and bring it up to par with other houses on the market. Then quickly sell it back at a profit, which should not be difficult as prospective buyers tend to like when rehabilitated work is already done for them. The profit can be ploughed back into another flip or some other investment, but the drawback to this option is that you're absorbing the stress of the renovation process, which requires fortitude to deal with workmen, and so on, plus the fact that there's no guarantee that the renovated house will be sold right away, thus potentially incurring additional carrying cost and therefore affecting your return on investment (ROI).
• Single-family rentals: One of the most straightforward ways of investing in real estate is buying a house and renting it out to a family. The rent should be more than the cost of the monthly mortgage, and the surplus would create the extra cash flow that you could save or put towards investing in another property. The biggest downside is maintenance, which can get very costly, eating away at profit, especially if your tenants are unreliable and irresponsible or if the property is ageing.
• REITs: Real estate investment trusts are also easier ways of investing in real estate without too much exposure to exit risk. Similar to mutual funds, REITs are investments in properties, as against shares of stocks in a business. The investor gains a share of the income generated by these properties by buying and maintaining these properties through pooling resources with other investors in a fund run by a fund manager. While the dividend yields of this kind of investment are usually high and very liquid, with the upshot of not getting directly involved with tenants, as well as avoiding the pesky legwork of buying, maintaining and/or selling the properties, REITs work better as long-term investments as too many factors, including interest rate fluctuations, can affect REIT prices over shorter periods of time.
• Personal residence: Buying a home and living in it is a sometimes overlooked but effective option when thinking about real estate investing. Sure, the ROI may not be immediately evident, but of all the real estate investment options it will provide the most peace of mind even while helping to build wealth for you over the long term, provided you maintain it, because its value will likely appreciate over time, becoming one of your best and most lucrative financial assets. However, while personal home ownership can help to diversify your portfolio over time, if your goal is the generation of cash flow, personal home ownership in the short term will feel like a living expense rather than an investment because of the amount of money you're spending on property taxes, maintenance, monthly mortgage and home insurance premiums.
Now you can read the Jamaica Observer ePaper anytime, anywhere. The Jamaica Observer ePaper is available to you at home or at work, and is the same edition as the printed copy available at https://bit.ly/epaper-login