Investing in real estate is a wise long-term investment, but when is the right time to get started?
It can be hard to tell when you should jump into the market. No one wants to start investing at the peak to lose it all when the market comes crashing down.
There are ideal times to begin investing in real estate. But the best time to start is now. Here’s why.
Why invest in real estate?
Investing in real estate has a number of advantages.
Some look to real estate as a means to diversify their investment portfolio outside of traditional investments like stocks or bonds. Others use real estate to get tax benefits, lowering how much they pay in taxes. Many enjoy the benefits of appreciation, which is the increase in value over time, and the ability to leverage the investment using a mortgage or other means of financing.
One of the top reasons to invest in real estate is to earn residual income, often called "cash flow." Cash flow is income earned from an investment property after paying expenses and any debt services. It can be a tremendous addition to your investment portfolio.
While there are dozens of ways to invest in real estate, investing with a focus on cash flow can create financial freedom and income well into retirement. If you buy an income-producing property that provides $500 a month in income after expenses and mortgage costs, that property can be held for 30 years or more. It can still produce a significant income decades later if it's maintained properly.
Once the mortgage is paid off, your cash flow will increase significantly. Plus, it will probably have appreciated over time. When you add 10 or 20 of those investments to your portfolio, you can earn a sizable monthly income that can consistently provide for you while also increasing your overall net worth.
These combined advantages of real estate investing are what make this avenue of investing so appealing.
Compounding interesting and real estate
Demonstrating the power of compound interest and its role in building wealth is easier with a standard investment like stocks than it is with real estate. Compound interest is calculated on the initial investment, including all accumulated interest returned over the life of the investment.
It’s how a $1,200 investment in the stock market receiving an average annualized return of 9% can become nearly $40,000 over 40 years without putting any more money into it.
Real estate growth is extremely powerful over time, but is challenging to demonstrate. Many variables affect how quickly or slowly you'll build up wealth and achieve financial freedom.
To start, investors typically buy real estate over inconsistent periods of time. That makes compound interest difficult to illustrate because of the periods of dormancy between investments. Also, some investors choose to take a salary or live off their real estate cash flow, while others reinvest their real estate income to grow their portfolio at a faster rate.
Additionally, different property types and markets yield different returns. Some cities and asset classes appreciate faster than others and some investments provide positive returns while others don’t.
You can use your own money to invest, slowly building a real estate portfolio as your salary supports it, or you can use creative financing structures like private lending, hard money, or other loans to buy properties. This lets you put none (or very little) of your own money down.
All in all, no two real estate investment properties or portfolios are identical. How you build wealth in real estate is unique. Real estate's flexibility gives you the potential to get higher returns and compound your money over time. It's just in a different way than you're used to seeing in the stock market.
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The sooner you start, the better off you’ll be
Regardless of how you choose to invest in real estate, there's no denying that the earlier you start, the better off you’ll be in the long run.
I started investing when I was 23. By the time I was 26, my part-time real estate business replaced my husband’s and my salaries. We were able to leave our normal 9-to-5 jobs to pursue real estate full time. While I chose an aggressive path to build wealth through real estate, you can invest at a more moderate pace while still reaping large rewards in the long run.
Investing at a young age means you have more time to invest, letting your money compound and grow. The later you start, the more money you'll have to put into your investments and the higher the rate of return you'll need to receive to get the same results.
Investing later also leaves less room for error. Real estate has risks and not every deal will go as planned. Starting young means you have more time to recover from those mistakes. Regardless of the age you start investing, it's important to be resilient and persistent in real estate. Setbacks happen.
Simply put, the less time your money has to grow, the more you have to put into it. Waiting until the "perfect" time to invest in real estate means you're losing time that your money could be growing.
The market will never be "perfect"
Timing the market is extremely difficult. During a recession and shortly thereafter, real estate prices are typically low and inventory is high. While it may be ideal to invest when the market is down, you don’t want to be on the sidelines waiting around for the next recession.
I cannot tell you how many times I’ve looked back on my investment career and thought, "I should have bought that." I made a million excuses as to why conditions weren’t ideal for buying a property and can say I’ve missed out on several hundred thousand dollars of appreciation, cash flow, and tax advantages.
If you’ve carefully analyzed an investment and the numbers work, chances are you should pursue it. Just remember to calculate the risk before buying. Make sure the investment can sustain itself through a market downturn or has a high enough return to allow adjustments in the rental rates, holding costs, or vacancy rate.