Why Is It Said That Real Estate Builds Wealth? Here’s Why!

Why is it said that real estate builds wealth? Well, investing in real estate can be a great way to make money. It can offer steady income and increase in value over time. But, you need to be cautious and do your homework before diving into the real estate investment world.

Why is it said that real estate builds wealth in different ways?

Real estate offers multiple ways to earn money – from property appreciation and rental income to various investment options. If you’re looking to build wealth, real estate investment is a solid choice. Remember that it’s more than just buying and selling properties. It’s a way to grow your wealth, earn appreciation, generate monthly income, and reach your financial goals.

The most common and perhaps the easiest way to make money in real estate is through appreciation. That is to say when a property’s value increases. This increase is influenced by factors such as the property’s location, development, and improvements. Additionally, real estate investors often earn income from renting out residential and commercial properties. There are also various investment alternatives in the real estate sector, such as Real Estate Investment Trusts (REITs), mortgage-backed securities (MBSs), mortgage investment corporations (MICs), and real estate investment groups (REIGs). All these offer diverse ways to invest in real estate. Let’s look at all of these options in greater detail, below.

What are some good ways to invest in real estate?

Real estate appreciation

This happens when property values go up over time. When you sell the house, you cash in on that increased value. For example, if you bought a house for $400,000 three years ago and it’s now worth $550,000, you’ve gained $150,000 just from appreciation.

Rental income

Owning rental properties is a great way to earn steady cash flow. You can buy land, build a house, and rent it out, or fix up damaged properties and rent them. Another option is buying turnkey properties or those with existing tenants. As long as you manage the expenses and the properties well, rental income can be a reliable source of passive income.

For instance, you can:

Buy a home, rent it out, or live in part of a multi-unit home and rent out the rest.
Rent out homes or rooms short-term in popular tourist areas. Of course, you need to be mindful of local rules for platforms such as Airbnb.

Flipping properties

House flipping is when you buy distressed properties, renovate them, and sell them for a profit. This can be lucrative if you have a knack for design and can spot properties with potential. However, it’s risky and requires a good network of professionals to help with finding, fixing, and selling the properties.

Investing in REITs

If you’re not ready to buy physical real estate, you can invest in Real Estate Investment Trusts (REITs). This is a good option for beginners since it allows you to invest small amounts without the hassle of managing properties. In REITs, you buy shares in a portfolio of properties and earn dividends from the rental income.

Real estate crowdfunding

Real estate crowdfunding lets you pool money with others to invest in properties through online platforms. It’s a modern way to get into real estate without buying a piece of property yourself. However, make sure to research the platform and the project’s management team.

How to prepare for your real estate investment?

First, get a good grasp of how the market works. Look into property prices, the neighborhood, upcoming infrastructure projects, and the builder’s reputation. Also, check out local rules, property taxes, and the legal steps for buying property. Knowing all this helps you make smarter investment choices.

Here are some useful tips on your first real estate investment.

Figure out the type of property and your financial goal

Ask yourself, do you want steady income or quick returns? Rental properties offer consistent income while flipping houses can yield fast profits. Choose between residential properties, commercial properties, or rental properties based on what you’re aiming for and your risk tolerance.

Select the right location

Location is key! Look for areas with growth potential, good connectivity, and amenities like schools and shopping centers. Keep an eye on market trends to identify up-and-coming neighborhoods that align with your investment goals.

Budget your purchase

Create a realistic budget that covers property costs, taxes, maintenance, and possible home renovations. Think about financing options and how they’ll impact your cash flow. Calculate expected returns, including periods when the property might be vacant, to ensure a solid financial plan.

Do your due diligence

Thoroughly check everything before buying. Verify the property’s title, ownership history, and legal clearances to avoid future problems. Have an experienced real estate attorney review contracts and ensure compliance with local regulations.

Maintain your property

For rental properties, screen tenants carefully and maintain good relationships with them. Regular upkeep, without a doubt, increases property value and tenant satisfaction. You may consider hiring property managers if you’re managing multiple properties to ensure efficient handling.

Be ready to adapt to changes

As a property owner, it’s your responsibility to stay updated on market trends, economic shifts, and policy changes. Be flexible and ready to adjust your investment strategy as needed. Monitor property appreciation and rental yields, and regularly reassess your portfolio to optimize wealth accumulation.

How to finance your real estate investment?

When it comes to investing in real estate, figuring out how to finance your purchase is crucial. The type of property you’re after will affect the kind of financing you can get. Here are some of your funding options.

Government-backed loans

If you’re just starting, you might use a Federal Housing Administration (FHA) loan to buy your first home. The down payment varies based on the property’s value. And, since the FHA backs the loan, lenders often offer better interest rates. For multi-family homes, you can live in one part and rent out the others, ideally making enough in rent to cover your mortgage and then some.

Traditional mortgages

A conventional mortgage from a bank is a reliable route. The loan terms depend on your credit history and the bank’s confidence in your ability to repay.

Cash savings

While cash is king and can make buying easier, it has its downsides. Paying cash limits your potential returns compared to using financing. For instance, investing $250,000 in a property and renting it out for $2,000 a month gives a 9.6% gross return. But, putting a $50,000 down payment on the same property with a mortgage means you might see a 25% return on your down payment due to lower monthly payments and leveraging the mortgage.

Private lenders

These offer more flexibility and faster funding than banks but usually come with higher interest rates.

Hard-money loans

These bridge loans are great for flipping houses, providing quick cash until you sell or complete home repairs. They’re fast but come with higher interest rates and risks if repairs take longer than expected.

Key takeaway

Real estate is a top choice for building generational wealth. If you want to diversify your investments and are ready for the long haul, real estate often delivers higher returns compared to other financial investments. And, does pave the way for financial freedom.

You have plenty of options to invest, from REITs and private funds to owning rental properties or exploring other avenues. The key is aligning your real estate strategy with your long-term financial goals and risk tolerance. Keep in mind that investing in real estate, without good planning and due diligence, may be risky. It’s because the real estate market goes through ups and downs. As an investor, you must research thoroughly, plan strategically, and manage your properties effectively.

Written by Ramona Sinha. July 6, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.