Rental investment is quite special because it can be classified in the second as well as in the third pillar. Indeed, a person can launch his own business to enrich himself through real estate. But anyone who is successful in their business should also consider real estate as their “final” investment. Instead of investing the earnings of your business in stocks, you can just as easily do it in real estate.
In this article, we will see together what can be the reasons that could push you to turn to real estate investment.
Advantages of rental investment
Take advantage of leverage
One of the first advantages of rental investment is that it is possible to take advantage of a leverage effect to acquire property. Therefore, you do not need to have 100% of the purchase price. It also allows you to buy larger properties with less money. But above all with less money than what would have been necessary to buy shares of the same amount for example.
The idea is to take advantage of the bank and the money it can lend us to take advantage of the leverage effect. Usually the bank asks for around 20% personal contribution. That is to say, it will therefore finance 80% of the property!
It is also important to realize that in a situation where you have 100,000 USD, you have two choices available to you:
- Invest these 100,000 USD in a single asset without borrowing money.
- Invest 20,000 USD in 5 properties each worth 100,000 USD by being financed by the bank the remaining 80%
Knowing that it is your tenants who will pay your loans, you will therefore finance 500,000 USD of property with 100,000 USD. Quite interesting!
Opportunity to work for yourself
Oftentimes it is mentioned that in order to achieve financial freedom, one has to be prepared to work like a hard one. And it is true that we must deserve it. But the rental investment will allow you to work for you as well. For example, you can do all or part of the work necessary to improve your property yourself. Whether renovating it or making other improvements, it will give value to your property which therefore increases the net worth of your wealth.
Ability to manage investments directly
You are solely responsible for your investments. Not only the way you will achieve them, your criteria etc. But also how you will manage them afterwards. You don’t have to report to a manager or anything. You are solely responsible.
People need a place to live
What is true today will also be true 50 years from now. People will always need a place to live. Thus, demand has no end, so it is indeed an investment that will last. This is not an uncertain business like a new startup or something else whose success is unknown. Here you have real estate that will always be in demand.
It worked for many people before you
Real estate has always been the most popular way to get rich. This is the medium that has created the most millionaires for a long time. So if it worked for so many people, why wouldn’t it work for you?
Stable and predictable
Regardless of that, real estate remains a stable and relatively predictable value. Indeed, there was the real estate crisis in 2008 but it remains an exceptional fact. But it always comes down to investing in bricks, in something concrete and physical. It is an investment that is more concrete.
In addition to all that, it is a very stable investment compared to all that is stock market investments where the value can gain several percent in a day just like the reverse.
The income from these rental investments is also predictable. The rents are set up front and each month you receive a fixed amount. Added to this, real estate grows, in general, by about 3% per year. All this is still quite stable, isn’t it? So if you can’t stand the volatility of the stock market, real estate can be a great alternative.
Finally, if you decided to do work on your property, you could also easily estimate the gains that this would bring you.
So I am not saying that making a real estate investment is easy. What I mean is that the strategies for success in this area are relatively easy to master. The general idea is to buy a good and to rent it so that the income exceeds the outputs. Say like that, it sounds simple, doesn’t it? It’s not about marketing strategies, creating innovative products, etc.
Ability to buy below market value
This is one of the points similar to investments in the stock market, is that it is always possible to make a nice capital gain by buying a good cheap. Imagine being able to buy a good 50,000 USD below its value. As soon as the sale is made, your net worth increases directly by 50,000 USD. Isn’t that wonderful?
Not having to be present to make money
I believe that the best advantage of rental investment is the possibility of generating passive income. You don’t have to be at work from 9 a.m. to 5 p.m. to earn this income, it will fall whether you work or not. You can be at the beach enjoying while your real estate investment pays you.
Rental investment generates income in 3 ways
When we think of rental investment, we do not always realize that it will allow us to earn in 3 different ways. And these are the 3 ways that make real estate investing so great.
First, real estate can simply increase in value. Just like a stock where the price can go up or down, the value of your property can go up or down. Unlike stocks, the value of the property will be much less volatile but can mainly increase for two reasons:
Natural gain in value
In general, real estate gains in value over time. If only because of the rising costs of living that real estate follows. But we’re talking about an increase of 3% per year in the value of the property. This value is only an idea and may fluctuate depending on various factors. But anyway, real estate naturally gains in value over time.
Forced value gain
It is also that your property gains in value in a “forced” way through renovations and other works. For example, if you buy a property for 100,000 USD and do a lot of work on it. It is quite possible that the value of this property will increase to 200,000 USD thanks to these arrangements.
Often we stop at this point, but it is also one of the most important. The rental investment, so well done, will allow you to generate a certain cash flow. Provided that your income is greater than your outputs, each month you will receive profits from your investment. This will therefore generate you a cash flow which will allow you to finance your rhythm of life. These can even eventually replace your income from your job.
It is the tenants who pay
Often underestimated, but thanks to the rental investment, it is your tenants who will pay for your property. Each month, their rent will pay off the loan. You can see it like, every month your net worth increases by the amount of the rent because your property belongs to you all the more.
Example: If you buy a property for 200,000 USD, with a loan of 150,000 USD. At the time of purchase, the net worth of your wealth is 50,000 USD (the amount of good minus what you owe the bank). But each time you receive your rent and repay part of the loan the above calculation changes. Let’s assume a salary of 1,000 USD for similar monthly payments:
- Month 1: Net worth = 51,000 (200,000 – 149,000 (remaining loan amount))
- Month 2: Net worth = 52,000 (200,000 – 148,000)
- Month 12: Net worth = 62,000 (200,000 – 138,000)
As we have seen throughout this article, rental investment is full of advantages. It is not for nothing that it is the preferred investment of rich people and also the one that has created the most millionaires. Even if it is a more substantial investment because we are talking directly about large sums, the advantages are undeniable.
And you, are you already investing in real estate? Do you think of other advantages? What would be your advice for our other readers? Do not hesitate to share your experience in the comments!