In times of uncertainty and ever-increasing inflation, we all want to put our savings into a sensible investment that will provide us with the so called protection, our money to be "eaten" by inflation. There are a number of methods of investing, the most popular of which - in real estate.
"Is purchasing a property a good investment?" is a question that causes controversy, not only during inflation. Therefore, today's article is dedicated to investing in real estate - is it a good idea, when is it appropriate to invest, what do we need to know, what to watch out for.
1. Investment vs Savings Protection
Before answering the question "Is buying real estate a good investment?", it is important to clarify that "investing", in the classical sense of the word, through which we invest money in order to generate income, is different from buying in order to "save" or "preserve" savings.
And because the term "investment" is often used colloquially to mean "saving", people are often left with a misconception about where it is best to put their money.
If we have decided to buy a property in order to generate income, we are expected to rent it out, for example, or resell it. In this case, we have invested our funds with the aim of a return and expect a profit.
However, if we have simply purchased the property in order to preserve our savings from inflation (depreciation), with no intention of generating income from it by renting it out and/or reselling it, in this case we are talking about "saving" or "protecting savings".
2. Is investing in real estate a good idea? (in times of crisis)
In times of crisis and inflation, while
- interest rates on deposits are close to 0%, making deposits practically unusable,
- interest rates on loans are low (currently below 3%), and
- inflation pushes up interest rates on loans… (**in Bulgaria)
- Yes, investing in a property is a good idea, and a good means of protecting savings!
One of the major pluses of properties is that they have always been and will continue to be in demand. Which makes them a suitable, and often preferred, investment method for both generating income and preserving savings from devaluation.
The annual income when renting a property long term, after deducting all the costs of maintenance, repairs after vacating, etc., can reach around 3% to 4%, which in the current economic situation, guarantees us at least that we will protect our savings from inflation.
By investing in real estate, you could realize as much as 7-8% or even up to 10% income per year from short-term rentals. However, it should be borne in mind that short-term renting involves more time and money - for advertising, property maintenance, welcoming and sending guests, etc.
Buying property can often also serve as a good alternative to keep savings from depreciating during inflation without the goal of realizing income.
In the event that we have spare funds that we are concerned will depreciate over time, and given that deposit accounts at current interest rates are no longer as effective, we could consider purchasing a property. In this way, we ensure that the purchasing power of our funds will be "preserved" over time. At a later stage, when the economic situation "calms down", if necessary, we could sell the property and, so to speak, "recover the invested" amount.
When the purpose of the purchase is to "protect our savings" it is extremely important to know exactly what funds we have and how much of them we can invest.
It is not a good idea, for example, 90% of the amount needed for the purchase of a property to be drawn on credit, with the idea to "preserve" the remaining 10% of our savings. That is, if our savings amount to 10% of the sale price of the property, it would be better not to invest in this asset.
At best, such an "investment deal" would be profitable if we have at least 50% of the funds needed to purchase the property. And the remaining 50%, with interest from the bank below 3%, we could draw on credit.
3. What is good to know when investing in property?
Whether we are buying a property for investment and income purposes or to 'save' our savings, there are a number of factors to consider before proceeding with a purchase.
#Allocate some of your personal funds.
The main disadvantage of real estate is its low liquidity, i. e. the inability to quickly sell the property and "convert" it into cash. Therefore, the best we can do is to set aside personal funds, whether in cash or in an account, that are at least equal to our expenses for a period of 6 months.
This way we will insure ourselves against the extraordinary costs that almost always emerge. Be it for car repairs, children's education, etc. And best case scenario, we'll be insured for a while if we're out of work too.
#First the financing, then the choice of the property.
A common mistake is to choose a home before we have thought about financing. If we rush the financing, there is a much greater risk that the terms of the loan will not be so favourable for us.
Tip: Research your financing options first - find out the terms and conditions that different banks offer. Find the best one for you, and then move on to choosing a property.
#Selecting the right property.
New or old construction - Be careful with your choice of property. Prices of old construction can be speculative.
The prices of new construction are, in most cases, calculated on the basis of the costs incurred for materials. However, this is not exactly the case with old-build properties. Quite often they follow the "trend" of the market and are offered at prices close to, and sometimes even the same as, a new-build property. Which is not very fair, given that the building is already depreciated and the materials used for construction may be of low or poor quality. *In new construction, you can always ask the investor what materials are used.
Additionally, older construction is likely to need a much larger amount of renovation. There is a big chance that we will have to chisel the tiles in the bathroom, remove wallpapers and level walls, take down old joinery, etc., which is accompanied by more costs. Costs for craftsmen to "remove" the old before laying the new, costs for construction waste, etc.
And the chance of finding an old property that doesn't need major renovation is not very high. And in the event that we find one, there is a risk that other, unforeseen repairs will occur, precisely because of depreciation.
Stage of construction - We also need to be careful when we buy a property on a pre-sale.
Prices of properties in the initial stage of construction can be significantly more advantageous. But lower cost is usually associated with higher risk. Risk that deadlines will not be met and construction will be delayed or the building will not be completed at all.
Tip: Research the developer/builder carefully and consult an attorney when signing contracts.
Choice of location - Location is one of the most important factors when choosing a property, whether for investment or for your own home. A good location will provide you with a higher rental income if you decide to rent out the property, and the selling price will maintain a higher level.
Tip: Take into account the characteristics of the neighbourhood (area) and how developed its infrastructure is. Proximity to schools and kindergartens, shops, hospitals, public transport or metro stops, parks and/or the sea, as well as proximity to the city centre. The quietness, peace and safety that the area offers, the possibility of parking close to the property, etc., are advantages that will always be sought after and preferred.
#DO NОT forget about costs.
We should not forget that the purchase of real estate is also accompanied by costs. It is a good idea to anticipate them as well, and carefully calculate whether we could bear their financial burden.
Property acquisition costs
- Property transfer costs (local tax; notary fee, registration fee)
- Agency commissions (if using the service of an agent)
- Bank costs (tax assessment, drawdown fee)
Expenses after we have purchased the property
- Tax expenses
- Repair and maintenance costs, etc.
Investing in real estate is not an easy task. It requires market knowledge and analysis, financial literacy, proper resource management, etc. The success of the investment can be affected by the amount of income, the amount of credit, the profession, etc., always take them into account! And be reasonable.
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