William Huston, AIF®, AIFA®

Is Real Estate a Great Investment?

For many investors, real estate investing has been a viable way for them to grow their wealth and diversify their investment portfolio. Some of the benefits that come with acquiring real estate as a physical asset include the potential for appreciation, cash flow in the form of rental income and tax advantages. As compared to other investment vehicles like the stock market, the real estate market is not usually affected greatly by short term volatility in the market.

William Huston, AIF®, AIFA®

William Huston, AIF®, AIFA®

However, like any investment, it also carries its own set of risks and challenges. By understanding the factors that make real estate an attractive investment option, you can be able to make informed decisions as someone looking to venture into investment real estate. Before you start investing, be sure to consult a qualified financial advisor, real estate professional or consider working with a credible real estate investment firm that can offer guidance on the state of the market and the best kind of investments to take advantage of.

Key Takeaways
  • Real estate investing can be a great way for investors to diversify their investment portfolio diversification and build wealth long term.
  • Before you invest in real estate, some of the factors that you should consider include your investment goals and strategy as well as the financing options that you have access to.
  • Some of the benefits of investing in real estate include steady cash flow in the form of rental income and potential for appreciation. A thing to take note of is that real estate investing often requires a significant upfront capital investment and physical real estate assets can generally be illiquid.
  • Before you get started in the real estate investing journey, ensure that you consult a qualified financial advisor and real estate professional so they can guide you throughout the process.

The contents of this article are for educational purposes only. They are not intended to be a source of professional financial advice. You will find experts on financial planning and financial management here. More on disclaimers here.

Overview of the Real Estate Sector

Over the last three years, it has been reported that the earnings for companies in the real estate industry have grown by 16% per year. That is an indication that sales have been higher overall and therefore the profits generated have also gone up. The interest rates in 2023 currently stand at 5–6%.

The residential Real Estate Market in the United States is estimated at USD 2.53 billion in 2023, and is expected to reach USD 2.80 billion by 2028, growing at a CAGR of 2.04% during the forecast period (2023-2028). However, according to Green Street Commercial Property Price Index, commercial real estate property values are down 15% in the past 12 months. 

Factors to Consider Before Getting into Real Estate Investing

realtors in a meeting

Before getting into real estate investing, here are key factors to take into account.

Financial readiness - Assess your financial situation including your available capital, creditworthiness and ability to handle ongoing expenses associated with investment properties such as mortgage payments and maintenance costs.

Investment goals - Be clear on your investment objectives and determine whether you're seeking long-term appreciation, regular rental income, diversification or a combination of these factors. Your goals will determine the type of real estate investment strategy you pursue. To align your investment goals, speak to a qualified financial advisor and real estate professional so they can offer guidance on the right next steps.

Market research - Conduct thorough market research to understand the current real estate trends, both locally and nationally. Analyze factors like demand and supply, the job market and economic indicators that can affect the real estate market.

Risk tolerance - Real estate investing carries inherent risks. Evaluate your risk tolerance, as different investment strategies and property types entail varying levels of risk. Consider how comfortable you are with market fluctuations, potential vacancies and the financial implications of unforeseen circumstances. Consider working with a real estate professional who can offer insights on the current state of the real estate market.

Location - Location is very crucial in real estate and therefore it is important that you assess the desirability of the location you're considering investing in. Factors to consider include proximity to amenities, safety and future development plans. A favorable location can increase the value of a property and rental demand.

Property type and investment strategy - Determine the type of real estate investment that aligns with your goals and resources. Options include investing in a residential property, commercial property, multi-unit property or real estate investment trusts (REITs).

Financing options - Explore different financing options and determine which ones are suitable for your investment strategy. Traditional mortgages, private lenders, partnerships or self-directed retirement accounts (SDIRAs) are common avenues for real estate financing. Before you take a mortgage, ensure that you are well aware of the loan terms and monthly mortgage payment fees.

Legal and tax considerations - Understand the local laws and tax implications related to real estate investing. Familiarize yourself with landlord-tenant laws, zoning restrictions, property taxes and any other legal obligations that come with property ownership. Consult with legal and tax professionals for guidance.

Property management - Consider the responsibilities associated with property management if you plan to invest in rental properties. Determine whether you want to handle property management yourself or hire a professional property management company. Property management entails tenant screening, rent collection, maintenance and addressing potential issues.

Exit strategy - Have a clear exit strategy in mind for your investment. Consider scenarios such as selling the property, refinancing or holding it long-term. Understanding your options in different market conditions will help you make informed decisions throughout your real estate investing journey.

Benefits of Investing in Real Estate

Potential for appreciation

Real estate can generate rental income if you choose to rent out your property. This can provide a steady stream of cash flow, which can be especially beneficial for long-term investments. Rental income can help cover mortgage payments, property taxes, maintenance costs and even generate a passive income stream.

Tax benefits

Real estate investment offers various tax advantages. Mortgage interest, property taxes and certain expenses related to property management and maintenance can often be deducted from your taxable income. Additionally, the profits from selling a property may qualify for favorable tax treatment, such as long-term capital gains tax rates.

Portfolio diversification

Real estate is often considered a good investment that can help you diversify your investment portfolio. Investing solely in stocks or bonds can leave your portfolio vulnerable to market volatility. Real estate investment property can provide a level of stability and act as a hedge against other investment classes, reducing overall risk.

Tax Benefits

Real estate investment offers various tax advantages. Mortgage interest, property taxes and certain expenses related to property management and maintenance can often be deducted from your taxable income. Additionally, the profits from selling a property may qualify for favorable tax treatment, such as long-term capital gains tax rates.

Tangible Asset

Most real estate assets are physical ones that you can see, touch and control. Unlike other investments that may rely on the performance of a company or market, real estate allows you to have a direct influence on its value. You can make improvements, renovate or use it as collateral when you want to access financing.

Inflation Hedge

In the past, real estate investments have acted as a hedge against inflation. As the cost of living rises, rental prices and property values tend to increase, allowing real estate investors to preserve and potentially grow their wealth over time.

Pros of Investing in Real Estate

  • Real estate has the potential to appreciate in value over time. Historically, real estate values have increased, allowing investors to build equity and potentially generate profits.

  • Investors of real estate, whether commercial or residential properties can earn rental income if they choose to rent out their property. Rental income can provide a steady source of rental income as well as serve as a passive income source that can help cover expenses such as mortgage payments.

  • Real estate investments can diversify your portfolio, reducing risk by adding an asset class that typically behaves differently from stocks and bonds. Real estate can act as a hedge against volatility in the market.

  • Since most real estate assets are physical ones that you can see and touch, they can provide a sense of security and control as you have the ability to make improvements, renovations and manage the property's value.

  • Real estate investments offer various tax advantages. Things like mortgage interest and property taxes can be deducted from your taxable income. Additionally, profits from selling a property may qualify for favorable tax treatment.

Cons of Investing in Real Estate

  • Investing in real estate can often require a significant upfront investment capital. Some of the expenses that you can expect to incur as an investor include down payments, closing costs, property maintenance and potential renovation or improvement costs.

  • Real estate is a relatively illiquid investment compared to stocks or bonds. It may take time to sell a property, especially during market downturns or in less desirable locations.

  • Real estate values can fluctuate based on the condition of the housing market and economic factors. Economic downturns or oversupply in specific areas can lead to declining property values, impacting the return on investment.

  • If you choose to rent out your property, you'll have responsibilities associated with property management, such as tenant screening, property maintenance and dealing with potential issues or disputes.

  • Real estate investments are influenced by location-specific risks. Factors such as neighborhood quality, economic conditions, job growth and local market trends can affect property values and rental demand.

Tips for Real Estate Investors

Tip #1: Set clear investment goals

Define your investment objectives, whether it's long-term appreciation, regular rental income or a combination of both. Clear goals will guide your investment strategy and decision-making.

Tip #2: conduct thorough market research

Ensure that you stay informed about the real estate market trends, both locally and nationally. Analyze factors like supply and demand, property values, rental rates, economic indicators and emerging neighborhoods to identify investment opportunities.

Tip # 3: Consider the location

Choose properties in desirable areas with strong growth potential, access to amenities and low crime rates. A prime location can drive up property value and rental demand.

Tip # 4: Do due diligence

Before making an investment, perform thorough due diligence. Evaluate the property's condition, financials, title history, zoning restrictions and potential risks. Engage professionals such as inspectors and appraisers to assist in the evaluation process.

Tip # 5: Crunch the numbers

Conduct detailed financial analysis to ensure the investment aligns with your financial goals. Consider factors like acquisition costs, ongoing expenses, potential rental income, vacancy rates, and potential return on investment (ROI).

Tip # 6: Build a network

Look for avenues to network with real estate professionals, investors and industry experts. Attend real estate events and join local investor groups to connect with experienced professionals who can provide guidance on potential investment opportunities.

Tip # 7: Have a contingency plan

Prepare for unforeseen circumstances by having a contingency plan. Account for potential vacancies, unexpected repairs or changes in market conditions. Maintain an emergency fund to handle these contingencies and protect your investment.

Tip # 8: Leverage professional expertise

Seek guidance from professionals such as a qualified real estate agent, property manager, attorney and accountant. Their expertise can help you navigate complex processes and maximize your investment potential.

Tip #9: Understand financing options

Explore different financing options and choose the one that suits your investment strategy. Compare interest rates, loan terms, down payment requirements and eligibility criteria. Maintain a good credit score and establish relationships with lenders to secure favorable financing.

Tip #10: Continuously educate yourself

Stay updated on real estate trends, market conditions and changes in regulations. Ensure that you read books, attend seminars and follow industry publications to expand your knowledge. Investing in your education can help you make informed decisions and adapt to market shifts.

How to Get Started Investing in Real Estate

To get started investing in real estate, it is essential to begin with thorough research and education about the real estate market and investment strategies. Set clear investment goals and determine the type of properties you wish to invest in; whether residential, commercial or rental properties.

Be sure to also seek professional advice from a financial advisor and real estate professional throughout your investment journey. Starting with smaller investments and gradually scaling up can help manage risk. With patience and a long-term perspective, you can achieve great success in the real estate investment journey.

Bay Street Capital Holdings

Bay Street Capital Holdings

Bay Street Capital Holdings is an independent investment advisory, wealth management and financial planning firm located in Palo Alto, CA, that is Black-owned. The primary objective of the firm is to manage portfolios with the aim of preserving and increasing total assets and income, while giving significant importance to managing overall risk and volatility. While many advisors may prioritize maximizing returns, Bay Street places a greater emphasis on mitigating total risk and volatility.

William Huston, the founder of Bay Street, established the firm after gaining 13 years of experience supporting the United States' largest retirement plan, the Thrift Savings Plan, which holds assets worth $650 billion. He was recognized by Investopedia as one of the Top 100 Financial Advisors for 2022.

In Scottsdale, Arizona, Ekenna Anya-Gafu CFP, AAMS has also earned recognition as one of the Best Financial Advisors for his exceptional qualities of responsiveness, friendliness, helpfulness and attention to detail. Bay Street's foundation was laid to advocate for diverse and emerging fund managers and entrepreneurs, supporting their growth and success in the financial industry.

In 2023, the firm's notable contribution in the real estate sector has led to Bay Street being recognized as a Finalist in the Wealthmanagement.com 2023 Industry Awards under the category of Asset Managers: Diversity, Equity and Inclusion for its work with Resthaven Properties.









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