The question, “What is investing in real estate?” cannot be answered without first considering its textbook definition and then its conceptual definition.
The academic definition
Real estate has been defined as land (or real estate) together with anything permanently affixed to the land, such as buildings, and investment is the act of using money to purchase property for the sole purpose of owning or renting for income. It is safe to say then (combining both definitions) that real estate investment involves the acquisition of real estate (or investment in real estate) for the purpose of generating income, making a profit, and acquiring wealth.
The Concept Definition
- take advantage of Unlike stock investments (which generally require more capital from the investor), it is possible to leverage a real estate investment (heavily). With a real estate investment, you can use other people’s money to increase your rate of return and control a much larger investment than would otherwise be possible.
- Tax haven Real estate investment provides tax benefits. There are returns on annual after-tax cash flows, capital accumulation through asset appreciation, and after-tax cash flow at the time of sale.
- Non-monetary returns Real estate investing provides pride of ownership, the security that you control the property, and portfolio diversification.
However, real estate investment is not a bed of roses. Real estate investment requires capital, there are risks, and rental property can require intensive management. On the other hand, the car you drive requires capital, involves risky driving, and certainly requires management. The difference is that a car is not a source of wealth.
How to become a real estate investor
- Develop a real estate investment goal. What do you want to achieve and by when do you want to achieve it? What rate of return do you expect to receive on the money you take out of your home or bank account to buy an investment property given the risk?
- Learn what returns to look for and how to calculate them. You can’t be successful in music unless you can read music. Invest in a good real estate investing course or real estate investing software where you can learn how to run returns and calculate formulas.
- Beware of Get Rich schemes. There are many so called gurus ready to teach you how to make millions with real estate investment properties. But let logic be your guide; we believe that nobody who finds a gold mine publishes a map.
- Establish a relationship with a real estate professional who knows the local real estate market and understands rental properties. Spending time with the “broker of the year” will not advance your investment goals unless that person knows about investment properties and is adequately prepared to help you acquire them correctly. Find an agent who understands real estate investing.
What is the conclusion? That real estate investing is a business about owning land which, when sensibly researched and purchased by unbiased numbers and careful management, and with reasonable goals and caution, is likely to be more valuable tomorrow than it is today .