Some hundred years ago, there were three basic assets you would consider investing in: shares, bonds, and cash equivalents. The last few decades brought to existence brand new asset classes, among other cryptocurrencies and so-called passion investments.
Still, one gem shines a bit brighter – residential real estate investing. To this day, investing in US residential real estate seems to be one of the most stable and most yielding investment options, in regards to the risk-return ratio.
Real Estate as the most stable asset class
These types of assets stand for safe and lower-risk investment options. Since real estate property is a tangible asset, based on “real” value, it adds greatly to the feeling of both certainty and stability to investors. Obtaining and/or selling real estate properties is a time-consuming process, which makes it difficult to react impulsively and panic-buy or panic-sell this type of asset.
On the other hand, you don’t have to worry that real estate might go out of fashion. In most cases, real estate asset price goes up over time. Plus, it is the single best asset for leveraging. It pays itself, even you cannot afford to buy a property in full in cash. With only investing 20-30% of the price, you can own the property in full in 10-20 years.
Investing in the US – Where to start?
The U.S. Housing is the world’s largest asset class, valued at $35tn
When it comes to real estate investment decisions, one should abstain from making any before conducting extensive research and analysis. The best way to start is by analyzing macro factors since those affect the market the most.
Macroeconomics, as a complicated branch of the economy, helps us determine and to the extent predict future economic trends. Macro factors include but are not limited to long-term GDP growth, mortgage trends, economic and market growth, consumer price index, home price index, etc.
The latest crisis, caused by a force majeure, showed us how intertwined life and economy are, and how difficult is to assess economic and market trends.
What we have learned about the US real estate market is that even during the 2008 crisis, which affected the housing market substantially, rent prices stayed stable and the economy revitalized itself. If anything, the ongoing pandemic-induced crisis can be depicted as a good opportunity for investing in US real estate.
The devil is in the detail with Real Estate investing
Let’s assume that we agree on what thing and that is that the U.S. economy (and/or market) is an extremely broad term. Not only that every state has its own jurisdiction and economic growth policies, but one might say that every neighborhood has its own microeconomic ecosystem.
The overall level of a single state’s economic health can be brought under the umbrella of macro factors since it’s greatly affected the abovementioned factors.
Still, some factors are strictly local and those include the volume of infrastructure expenditures of a city or municipality, local income and real estate-related taxes and regulations, the vacancy rate inside the state.
Choosing real estate is a fluid process, in which one unfavorable factor can bring you back to the starting point.
The idea behind investigation regarding macro and micro factors is grounded in the intent to discern between good and ideal investment. What seems to be a really good investment today can become a bad one in years to come.
The risk is omnipresent, but it can be mitigated by an informed decision-making process. It requires a lot of research, calculation, and thinking.
Since real estate investments are long-term, one must think about the future outlook before making any decisions.
Never underestimate the power of the neighbourhood
A common mistake among inexperienced investors is to base decisions on a property, without factoring in the surrounding neighborhood. Obviously, no one is expecting that investing in property in the middle of a favela could turn out to be a smart decision.
Proximity to the city center, shopping malls, schools, transportation infrastructure should always be considered. Nice, decent neighborhoods usually come with high property prices.
Our strategy includes buying bulk properties and then investing not only in single properties but in whole neighbourhoods. This gives additional leverage to grow properties’ intrinsic value over time.
Using leverage
As a single investor, with limited cash on hand, you can always leverage by investing in 20-30% of property value and repaying the mortgage with rent money.
This could mean that instead of buying one house for, let’s say, $65.000, you can buy three of them by paying only $19.500 per house at first. If you follow the one percent rule, then your median monthly rent should be at least $650.
In less than ten years you can own all three properties in full while being able to pay for taxes and maintenance. Then you can reinvest this money, this time buying 10 houses, using the same leveraging principle.
Residential Real Estate vs. commercial Real Estate
Every type of property has its own perks, undoubtedly. For us, residential has always been the first choice. Without the intention to interfere with anybody’s personal preferences, we would like to discuss the example of shopping malls, a symbol of USA teen culture and consumerism.
This type of property, not so long ago, was the perfect investment opportunity not only inside the U.S. but in most other first-world countries. However, the subculture of shopping havens has been diminishing and was slowly replaced with online binge shopping.
Although we are sure that investors made a fortune, the majority of once crowded malls are turning into scenery for apocalyptic movies.
Meanwhile, people are still living in surrounding neighborhoods and are still buying. Most importantly, they are still renting houses.
Even though the way we approach consumerism has changed due to online shopping, one of the most important life necessities – housing, hasn’t changed one bit. Latest consumerism trends, such as zero waste movements and minimalism, can only encourage us to invest in existing residential properties, instead of building new ones from scratch.
Leaving these ethical considerations aside, residential real estate investments continue to be stable and certain investment opportunities, with a significant amount of leeway for adjustments and aligning.
