Why invest in real estate? – Real estate investment and comparison with other forms of investment
Money can be invested in many different areas, such as stocks, funds, cryptocurrencies, forests, and even art. There are countless options, and each form of investment has its own advantages and disadvantages. Real estate investment is one of the most traditional and still very popular forms of investment. So why is it worth investing in real estate, and how does real estate investment differ from other forms of investment?
In this article, we will explore the benefits of real estate investment and compare it to investing in stocks and funds, which are the most popular forms of investment among Finns.
Investment property is a tangible and stable investment
One of the biggest advantages of real estate investment is that apartments are tangible assets. Unlike stocks or cryptocurrencies, for example, a property is a physical asset that you can touch and use. Properties generally hold their value well against inflation, making them a safe investment in uncertain times.
The value of stocks and cryptocurrencies can fluctuate significantly depending on the market, whereas the value of real estate is generally more stable. Real estate prices may decline in certain areas or during economic downturns, but historically, real estate values have risen over the long term. Furthermore, unlike many other forms of investment, investors can actively influence the value of their property, for example by renovating it or influencing the decision-making of the housing association.
Passive income and tax benefits
Real estate investment offers the opportunity for passive income in the form of rental income. The rent paid by tenants covers the loan servicing costs and also generates a profit, which can increase wealth in the long term.
In addition, real estate investment offers several tax benefits that can significantly improve the profitability of the investment. One of the key benefits is the right to deduct rental income from taxable income. In practice, this means that expenses related to rental apartments or their rental can be deducted from rental income. Typical deductible expenses include travel to the apartment related to rental activities, as well as apartment management and rental services. We use Rentsi Vuokravälitys services for renting and managing apartments. These kinds of outsourced services are tax deductible and make life a lot easier for real estate investors. It's good to remember that you can also deduct expenses and costs related to renovating the apartment from your rental income.
For some, it may be obvious that recurring expenses related to the apartment are also deductible. However, if you are considering purchasing an investment property for the first time, it is important to remember that taxes are not paid on the entire rent, but on the portion that remains after all costs have been deducted. Therefore, always deduct the maintenance fee from the rental income.
The appreciation potential and leverage effect of investment properties
The value of apartments may increase over time, which can generate significant profits for investors. Especially in growing areas where there is demand for apartments, the value of apartments can increase significantly. The value of apartments fluctuates over time and with the market, but in the long term, the value of real estate has risen and will certainly continue to rise in the future.
You can also use leverage, i.e., borrowed money, in real estate investing. With a loan, you can buy more properties and grow your wealth faster. However, it is important to remember that leverage also works in the opposite direction: if the value of the properties falls, the losses can be greater, at least if you need to sell the property unexpectedly in a poor market situation.
You can also take advantage of leverage, i.e., borrowed money, when investing in real estate. If you are just considering buying your first investment property, you have probably heard the term “debt leverage” many times, but what is debt leverage? Debt leverage simply means that you can use a loan to buy more properties and grow your wealth faster. However, it is important to remember that leverage also works in the opposite direction: if the value of the properties falls, the losses can be greater, especially if the property has to be sold unexpectedly in a poor market situation.
Special features of real estate investment
Real estate investment differs from many other forms of investment in a few key ways:
- Long-term perspective: Real estate investment is a long-term investment that requires patience. Unlike stocks, real estate is not usually bought and sold quickly.
- Lower volatility: Real estate investing is generally more stable than stock investing. The value of real estate does not fluctuate as much as stocks.
- Active role: Real estate investing often requires a more active role from the investor. Finding tenants, drawing up rental agreements, and maintaining the properties takes time and effort. However, there are now investment property management services that can make real estate investing considerably easier.
Comparison with fund investing
Fund investing is an easy and relatively risk-free way to invest money. Funds diversify investments across several different targets, which reduces risk. Fund investing is well suited to passive investors who do not want to spend a lot of time managing their investments. A typical fund investor sets up a monthly savings agreement and invests money in a specific fund every month. When you want to convert your investments into cash, this can often be done within a few days, depending on the fund. Funds therefore offer the opportunity to access your money more quickly than, for example, real estate investments.
Comparison with equity investing
Investing in stocks means buying shares in a publicly traded company. You can get dividends from stocks, and their value can go up or down depending on the market. The difference between fund investing and stock investing is that a fund is managed on your behalf and typically invests the fund's assets in several different companies, thereby spreading the company-specific risk across multiple targets.
When investing in stocks, it is important to know the company you are investing in, understand its business, and assess its success in the market in which it operates. Selecting individual stocks is difficult, and doing so successfully often requires a professional approach and knowledge of how the market in which the company operates actually works. Stocks are bought and sold on the stock exchange every weekday, so converting them into cash is easy, just like with fund investing. Stock investing therefore offers investors a significantly faster way to convert their assets into cash than real estate investing.
Opportunity to improve returns yourself
However, real estate investment offers some advantages over fund investment or stock investment. For example, a real estate investor can influence the profitability of their investment by renovating the property or choosing a good tenant. Ordinary investors have no influence over funds or listed company shares, and cannot influence companies through their own contributions or actions. When faced with fluctuations in the value of funds or listed company shares, investors are completely at the mercy of the companies and cannot influence the value of their investments through their own contributions or actions.
Leverage and its utilization
As mentioned earlier in this text, real estate investment also offers the opportunity to leverage. Typically, you can get a loan from a bank for 70–80% of the current value of a property. This is often used when you want to increase your real estate investments and acquire more properties. Stocks also offer this opportunity; typically, 50% of the value of listed stocks can be used as collateral for a loan. However, this is not usually used because the risks of investing in stocks with borrowed money increase enormously. In the worst case, a stock can lose its entire value, although this is unlikely in the case of larger companies. However, the risk does exist.
Risks of real estate investment and other factors to consider
Real estate investment also involves risks that should be taken into account:
- Vacant months: Tenant turnover can result in vacant months during which the apartment does not generate rental income.
- Unexpected renovations: Apartments may require unexpected renovations, which can be expensive.
- Rise in loan interest rates: A rise in loan interest rates may reduce the profitability of the investment if the loans taken out for the investment property have not been hedged with interest rate protection.
- Decline in the value of the area: The value of apartments may also decline, which may result in losses for the investor if the sale takes place at a time when the market is experiencing a downturn.
Summary
Real estate investment is a good option for long-term investors who want to grow their wealth and create passive income streams. Real estate investment offers several advantages, such as tangible assets, passive cash flow (i.e., income), and the potential for appreciation. However, real estate investment is not a shortcut to happiness, and it is important to keep in mind the risks and downsides associated with real estate investment. So, be sure to do your homework thoroughly and familiarize yourself with the investment property you are considering purchasing before making a decision and signing on the dotted line. Also, keep in mind that we professionals are here to help you.
So, if you need help getting started with real estate investing, we strongly recommend that you check out our selection of investment properties that have been proven to be good investments, or contact us and tell us about your situation – we are sure to find an investment property that suits your strategy and allows you to start your journey as a real estate investor.
If you are a more experienced investor and already own a large portfolio of investment properties and want to grow your portfolio or realize part of it, we have extensive experience in working with large portfolios and the insight that comes with it on how to develop them. Contact us and let's take a look at your portfolio together!