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Houses are usually considered one of the safest investments available. Nevertheless, there are some important things to take into account.
The reasons behind the choice of buying a home dramatically affects the possibility to consider houses as investments – in fact, in reality, houses are not always investments.
In this article, we will analyse the most common scenarios, as well as the characteristics that can determine if a house is a real investment.
- 1 Is a house an investment? Let’s consider the reasons why we buy a home
- 2 The difference between assets and liabilities
- 3 How real estate is influenced by external factors
- 4 Ways to invest in houses for profitability
- 5 Conclusion
- 6 FAQs
Is a house an investment? Let’s consider the reasons why we buy a home
For sure, the main reason why you buy a home is that you need a place to live. In this case, houses can rarely be considered as investments.
In fact, to recover – and preferably increase – the amount you spent to buy the house, you need to sell it.
But what if that is the only place where you can live? In this scenario, you won’t really have the opportunity to analyse the market under an objective perspective.
When it comes to investments, there is only one rule – as Warren Buffett always says: never lose money.
But when your decisions are driven more by your needs than by the real conditions of the real estate market, you might end up losing money.
Actually, the only way you have to consider a home an investment is reselling it for a higher price than the one you paid. But if you need to buy a house in a particular moment of your life, or if you need to sell it because maybe you need to move, or because it’s no more suitable for you, you won’t really analyse the market. You will act according to your immediate needs, without any possibility to use a long term strategy.
Moreover, you need to consider how you buy the house, and possible expenses.
The difference between assets and liabilities
Only assets can be considered investments. The primary purpose of an investment is to earn a return, which is typically achieved through assets.
This happens because assets, simply put, are those instruments that put money into your pocket.
If you need to ask for a mortgage, you’ll end up spending more than the actual price of the house – because of interest. In this case, your house becomes a liability, because it takes money out of your pocket.
The same applies when you live in the house you consider as an “investment” and, inevitably, you’ll need to spend more money for maintenance work over time. So, if you want to sell the house, you don’t only need to consider the amount of money you spent to buy it, but also all the related expenses. It is really hard to recover more than the money you spent, also because the real estate market is largely influenced by external factors – which are completely out of your control, plans and any possible strategy.
How real estate is influenced by external factors
The price of a house is affected by factors that you may not even imagine.
In general, the common conviction, based on long-term observations and facts, is that the price of houses increases over time. This is why houses are commonly considered investments – and safe investments.
But, in reality, it might become one of the riskier investments, precisely because there are too many external factors that affect real estate, and they are macroeconomic factors completely out of your control.
An interesting article published in 2022 by Atlantis Press takes into account residential real estate. The market of reference is the United States, but the assumptions you can find in this article can work at a global scale.
The study analyses the price of houses and the factors that influenced it in the last 15 years. It identifies mainly five factors that affect the real estate market:
- Stock prices,
- RGDP – Real Gross Domestic Product, which is a measure adjusted for inflation that indicates the value of all services and goods produced by an economy,
- Mortgage rate,
- Unemployment rate.
As you can see, these are all macroeconomic factors that can’t be controlled by single individuals.
Population has to do with supply and demand – the larger the population, the higher the demand for houses, the higher the prices.
Stock prices and RGDP have to do with the general wealth of the population: when the stock prices rise, it’s assumed that the wealth of investors increases, and the investments in the real estate market increase too; a similar reasoning is applied to high RGDP, but all the population is involved – not only investors.
Mortgage rates directly influence the demand for houses – and the price of houses.
They’re usually increased to regulate the market or in periods of high inflation. When mortgage rates are low, the demand for houses increases. But when they are increased, loan pressure is higher and it limits the demand for houses.
There is a negative correlation between unemployment rates and the price of houses – the higher the unemployment rate, the lower the demand, the lower the prices.
Some considerations on the perception of houses as investments
As we said, all the external factors that can affect the price of your house are out of your control. This is particularly dangerous because this means that you buy a house for personal reasons, while elements that affect what you considered an investment are all but personal.
Moreover, there is another point to take into account: houses are not liquid assets.
This means that they don’t generate cash flows and it’s not that easy for supply and demand to meet.
All this being considered, there is only one option left to consider a house as an investment – that is, when it’s not the place you want to live in.
Ways to invest in houses for profitability
When the house you want to invest in is not your home, it is easier to eliminate the personal factors that influence your investment.
Moreover, there are also ways to invest in real estate without actually buying a property.
So, let’s see what are the top profitable ways to invest in real estate – so you can really consider houses as investments.
If you own a property, or if your contract allows you to sublet, then you have the opportunity to generate some cash thanks to a residential real estate property.
Leasing a property to business owners can be a profitable endeavor. Owning a house offers certain benefits, since the process is not very complicated, and you can even decide to rent out only a part of the house if you own it.
If you own a property that can fit the needs of a commercial activity, leasing it to business owners can be a profitable endeavor.
Buy and resell with house flipping
For some people, this is a full time job. It basically consists of buying undervalued houses and renovating them to sell them for a higher price. Also in this case, you need to understand and consider the whole condition of the market. But the advantage is that you don’t have personal boundaries. Moreover, If done correctly, renovating a house with limited funds can be cost-effective.
Today, crowdfunding covers countless types of projects and it also allows non institutional investors to back huge projects.
Real estate, which requires large sums of money if you’re alone, now is available also to people with relatively low budgets.
In this case, you don’t need to buy a whole property to invest in houses. You can become a part of pools of investors that put together their budgets to invest in real estate, and then share profits when the property is sold – or if the profits consist of interests.
Crowdfunding is not a risk-free activity, but it’s a good occasion to diversify your portfolio, invest in real estate without having large resources, and at least limit risks and personal involvement.
Not everyone can have access to institutional financing when it comes to buying a house. This can happen if a person does not have the right credit score, and the result is that they can’t access mortgages from banks.
A solution to this is private lending. Participating in the real estate market as a lender may present opportunities to generate revenue while minimizing risks.
Invest in corporations and trusts based on real estate properties
There are many financial products and companies that focus on real estate investments.
To mention the most relevant:
- MICs – Mortgage Investment Corporations. As the name suggests, these corporations only focus on mortgages. They lend funds to people interested in buying houses, so if you invest in them, your profits correspond to the interest generated by loans.
- REITs – Real Estate Investment Trusts. These trusts own many real estate properties, and shareholders can invest in these trusts to earn a part of the profits generated by each property.
- REIGs – Real Estate Investment Groups. These groups are private and focus on different activities related to real estate properties – like renting, buying, renovating properties. Also in this case, you earn a part of the profits according to the amount you invested.
Moreover, there are additional financial products linked to these entities – for instance, you can find REIT ETFs.
Benefit from fragmentation and blockchain technology
Blockchain technology brought countless new opportunities across different markets. Real estate makes no exception.
NFTs can generate profits. The non-fungible tokens based on this technology, new companies were born to give everyday traders and investors the opportunity to have access to real estate properties without risking large amounts of money.
One of the ways to benefit from NFTs is fragmentation: today, it is possible to invest in tokens that represent real assets but in a digital and fragmented form.
Real estate is a risky market, more than it’s commonly perceived. It is important to understand that when you buy a house, it can’t always be considered as an investment: mortgages, expenses and personal reasons that can lead you to buy a house even when the market is not favourable, can’t always allow us to consider houses as investments.
But there are still ways to use houses as investments – especially when you’re not personally involved in the purchase. House flipping, lending and fragmentation are only some of the ways to invest in real estate that we listed in this article, and they can fit the needs of beginners, experienced investors, and people with different budgets to invest.
Houses are not always considered investments, as personal reasons for buying a home can affect the ability to profit from the property.
Factors such as the purpose of buying the house, the ability to resell at a higher price, and the absence of personal constraints that may affect market analysis can determine if a house is a real investment.
Blockchain technology can be used in real estate investments through the use of non-fungible tokens (NFTs) and fragmentation, allowing investors to have access to real estate properties without risking large amounts of money.
Some profitable ways to invest in real estate include renting out properties, house flipping, using crowdfunding, private lending, and investing in corporations and trusts based on real estate properties.
External factors that affect real estate prices include population, stock prices, Real Gross Domestic Product (RGDP), mortgage rates, and unemployment rates.
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