Yes, it is indeed possible. If you do the math, with a 25% upfront payment on a 1 million dollar property and a 5% interest rate, purchase a house with a standard 4-5% cap rate. You end up paying $300,000 in your first year of owning the house. This means that once you pay off the debt (let's say in 6 years), you will have paid a total of $1,300,000 for a property that is now worth around $2,000,000. That means your yearly yield is around 8.3%. If the current inflation rate of 8.2 percent, persists, you get an additional hike in your profit.
This will make your total return percentage to be around 16.5%. This way you can leverage your investment against the current rate of inflation and safeguard yourself from rising costs by benefiting from it instead.
These figures are of course a bit ideal. But even if you are unable to meet any of them, you will still be able to make a great return on your investment in the next 3-4 years. As long as the inflation rate remains what it is today. So now is a great time to invest in real estate. Real estate should hence be a prominent asset class in your overall portfolio. Moreover, your asset allocation among asset types should reflect your risk-return profile.
Let's compare real estate to the other investment options out there:
Real Estate vs Other Investment Options
There are numerous possibilities available when searching for places to invest your capital. We've all heard of the phrase 'don't put all your eggs in one basket.' This is a common sentiment among investors as they try to diversify their income through investments. Because the likeliness of every investment failing at once is very rare. This means that even if one investment doesn't do very well, you have multiple others to keep you afloat. Regardless of your degree of experience, you should buy stocks, bonds, exchange-traded funds, index funds, and property investment; but, for new investors, currency trading or cryptocurrencies may be too unpredictable. Your decision will be influenced by your level of investment involvement, your starting capital, and the level of risk you are willing to accept.
Investment in real estate is a method that may be both rewarding and profitable. Potential property owners can utilize leverage to purchase a home, unlike stock and bond traders, by paying a percentage of the entire amount upfront and then taking a loan on the remainder,
Real estate has always protected investors from market turbulence and inflation. The value of property and profits rise along with interest rates and inflation, as illustrated by this data from the White House:
According to US Census data, 65% of US nuclear family homes are inhabited by their owners. Historically, investors have utilized real estate as a hedge against rising prices and market turbulence. As inflation goes up, real estate values often climb but market volatility typically increases. This post provides a useful foundation for contrasting equities and real estate on the way to creating a unique portfolio.
Since they take into consideration short-term swings, long-term investments typically outperform shorter-term ones.
What causes the market fluctuation in real estate?
Because the real estate market also significantly depends on supply and demand, it is a highly watched statistic in the sector. Obviously, a buyer and a seller are involved in every housing deal. The seller has the option to accept or decline the buyer's offer to purchase the home.
The laws of supply and demand work against each other until equilibrium is reached. When there are too many buyers and very few suppliers, the bidding price keeps increasing. As there are always people who can afford to pay a higher price to acquire it. This drives up the price.
On the other hand, when there are many sellers, but not enough buyers, the buyers need to settle at the price given by the highest bidder. Where the bidder can easily choose another house if the seller doesn't agree to his bid. This leads to a fall in price.
When people think of investing, stocks and real estate are frequently the first things that spring to mind. While these are both solid choices, other alternative assets can occasionally outperform them. Especially in the long term, where real estate has a steady increase compared to the stock market, which is more volatile.
source: Fit Small Business
Both real estate flippers and owners are empowered by the ability to assume possession of the asset as soon as the paperwork is finalized. Also, they can, in turn, take out a reverse mortgage on their houses to pay down payments on more properties. This is a big advantage for real estate investors.
A fixed-rate mortgage has constant installments; inflation, nevertheless, changes the value of the money that will be repaid later. Together with inflation, equity increases. This connection implies that real estate investment profits increase as well.
Real estate profits and short-term hyperinflation have little in common since borrowing costs are more strongly correlated with the 10-year Treasury bill. The interest rate on the 10-year Treasury bill increased from 1.3% in December 2021 to a little over 3% in June 2022.
The demand for loans and refinances decreases when these Treasury rates climb. However, because they are already committed to lower rates, the impact on investors is lessened.
These advantages do not exist for traditional stock market investors.
Here are two types of popular real estate investments:
Rental Residences
For anyone with DIY remodeling abilities and the patience to supervise renters, buying rental homes might be a terrific option. This tactic does, nevertheless, need a sizable amount of funding to cover the void months as well as the initial maintenance fees.
Pros
- Leverages money to its fullest potential
- Safeguards from inflation
- Delivers good, consistent revenue and increases the value of assets
- Several related tax-deductible costs
Cons
- Property management may be tiresome.
- Renters' potential for causing property destruction
- Decreased revenue due to probable openings in neighborhood houses
Real Estate Investment Trusts (REITs)
For individuals who desire portfolio exposure to the residential estate without engaging in a conventional property purchase, a real estate investment trust (REIT) is the ideal option.
Whenever a business (or trust) invests money from investors to buy and manage rental properties, a REIT is formed. Similar to any other stock, REITs may be purchased and traded on the main exchange marketplaces.
In order to keep its REIT designation, a company must distribute 90% of its taxable income as dividends to the investors on the exchange. In contrast to a traditional corporation, which would be taxed on its earnings. And would then have to determine whether or not to disperse its after-tax gains as dividends, REITs simply do not pay corporate income taxes by doing so.
REITs are a smart buy for investors in stocks who want consistent income, much like conventional return on capital equities. Unlike real estate investment firms, REITs give investors access to non-residential assets like malls and office complexes, which are typically too expensive for ordinary investors to buy independently.
Equally crucially, since they are exchange-traded trusts, REITs have a high level of liquidity. To assist you to cash out your investment, you will not need a title transfer and a property agent. In actuality, a real estate investment group is more institutionalized by REITs.
As demonstrated in the article above, it is not impossible to make a 15% profit off of the real estate market with a standard risk appetite. In fact, those are average returns of the RE market. With some research, and diversification in terms of REITs and property investments, you would be able to get an appreciable return on your investment within a 5-6 year timespan.