As an experienced real estate investor, I’m often asked about exactly what makes real estate a good investment.
My experience is in the European commercial and residential real estate sectors – Austria and Germany in particular. And these are markets that have certainly offered me some good returns over my investment career.
But from the perspective of someone on the outside of the industry, looking in, why should you enter this area of investing?
As a specialist who has gained a lot from the sector over the years, I want to share a few of my thoughts.
What makes real estate a good investment?
There is a general perception among investors that real estate usually delivers a good return over time, for relatively low levels of risk. Is this true?
In my experience it is. Compare it to investing in stocks and shares for example. Stocks generally offer investors high returns (if the investor knows what they are doing and understands the market) – but the risks are also higher. Stock values are incredibly volatile, at least compared to the value of bricks and mortar.
In contrast, what makes real estate a good investment is that property investment certainly does seem to offer good returns, but with considerably fewer risks. Property investment almost always benefits those investors who are willing and able to hold on to their assets over the longer term.
Here are just a few of those benefits.
The benefits of investing in real estate
One of the biggest advantages of real estate investment is that it offers steady and predictable rates of return over time. Putting your money into real estate is a great strategy for steadily building wealth over an extended period.
Sure, property can also take a lot of management (and even further financial investment) over that time too. But this is where having a good team around you comes in. Finding the right people to maintain the property and look after your tenants is crucial.
But remember that all of that investment in terms of time and money is directly adding value to your initial investment. Real estate is fairly unique in this sense and is one of the biggest attractions for those who have the capital to spend on improvements.
Inflation is the real estate investor’s friend
Of course, another key driver in this steady accumulation of wealth that we see with real estate is inflation. Both house prices, and the cost of living in general, are on an upward curve. These factors are huge plus points for anyone who can afford to get into real estate ownership.
Over the last few decades, we’ve seen house prices steadily rising across Europe. Take the German market as an example, where house prices grew 4.6 % year on year in 2018. The previous quarter was even more impressive, with rises of 5.1 % year on year.
In Austria meanwhile, real estate investors are enjoying residential property price increases of up to 7.97% through Q3 of 2018. This kind of appreciation means anyone wanting to sell up and realise their investment can look forward to a big mark up on their initial purchase price.
In addition, as a real estate investor, the inflation we see in living costs is also on your side.
Globally, inflation rates tend to be positive, rather than negative. And as living costs gradually go up, this means that rents naturally rise too, increasing your regular monthly income. In the ideal scenario for property owners, interest rates for borrowers also come down.
This perfect storm means that you are both increasing your rental income, while paying back at a lower rate of interest to your mortgage lender.
Gaining a foothold can be tricky
There are a few things going against real estate investment too, of course. One is simply that it is an expensive area to get a foothold in. The initial capital outlay, in the form of a deposit on a property, is prohibitive to many investors.
It is a situation that is unlikely to get any easier any time soon either. In a city like Dresden for example, the median price for an apartment price leapt by around 11% per square metre last year.
But while this is true, it is also far easier to borrow money to buy a property than it is to borrow to finance any other kind of investment. Despite there being a little more caution among lenders since the stock market crash, you’re still likely to be lent money to buy a property. Providing you have the means to pay it back, of course.
A flexible approach to real estate investment
I also just want to quickly deal with another common criticism of real estate as an investment option too. That it is hard to realise your investment quickly if you need to.
The argument goes something like this – that stocks and shares can be bought and sold quickly, giving you liquidity when and where you need it. Compare this to the sale of a property, which is complex and can take many months.
Well, this is all true, but there are other options. Not least real estate investment trusts (REITs). One of the key advantages of investing in real estate in this way is that you can buy and sell your shares in the REIT quickly, just like stocks and shares on the financial markets.
So, you can enjoy the benefits of real estate investment, with the speed and convenience of stock market investing. They are also a great way to enjoy a diversity of real estate investments, as REIT portfolios usually have portfolios in a range of property sectors.
For me, the bottom line is this. If you can afford to get the capital together to buy a property, afford to keep up the mortgage repayments and you’re willing to hold onto the property for potentially many years, inflation alone will make you money.
And if you have the money available to diversify your portfolio with other properties – perhaps ones you can add value to and sell quickly – then all the better.
Avner Motaev manages several companies in the real estate and telecommunications industries. He is the founder and CEO of mobile2business and lives and works in Vienna.