If you’re interested in real estate, but not yet a pro, then you probably have a lot of questions as to how everything interacts. For instance, why do some people buy and others sell? Why do some people choose to rent? Is there a best option?
Real estate is certainly a complicated thing. Let’s break things down and take a closer look at buying, renting, and investing in real estate. Then, we’ll examine why each is beneficial, and to whom. Finally, we’ll talk a little about housing shortages.
What’s really going on?
There’s a great deal going on in real estate. Real estate is expensive and not very liquid (a financial term that refers to how easy something is to sell for cash). Buying property usually requires a mortgage with a down-payment. That locks up some cash in the property, which can then change in value. This can be either good or bad, for investors and regular homeowners alike. Then, we have to consider the laws and regulations around real estate, including everything from federal tax laws to neighborhood associations that tell you what color your shutters have to be.
These complex factors mean that there are incentives for each of the things you mentioned: buying a home, renting a home, and investing in real estate.
Buying a home is appealing in many situations, because it gains the buyer a huge asset–the property itself–which can then increase in value. Mortgage payments give you a living space in the present, and the rights to the future value of your property, whereas rent payments only give you the former. However, the drawbacks include the fact that you have a great deal of cash tied up in the property–cash you might otherwise invest in higher-earning and more liquid vehicles or stocks. You’ll also be responsible for maintenance, and you’ll have to deal with laws related to property ownership. Getting a quality home will help improve the upside and limit your risk, say custom home builders. However, homeownership means risk and responsibility, no matter how you slice it.
Some people choose to rent instead of buy. The advantages here are that you will avoid the big down payment required to get a mortgage. That money can be invested for the future, instead, giving you financial flexibility as a renter. You’ll limit your risk, too; if a pipe bursts, you can just move out. It’s not your problem–it’s the landlord’s. The downside, of course, is that you’re “throwing money away,” because the rent payments you make are in exchange for a living space right here, right now, and nothing further.
Finally, there is real estate investing. Landlords make money off of renters, as you stated. Being a landlord combines an investment with a job: the property will generate income (via rent), while fluctuating in value, as all properties do. The landlord will also have to tackle day-to-day tasks like finding clients, collecting rent, and handling maintenance. There are ways to make these tasks easier, say the minds behind popular landlord software, but there’s no denying that a landlord has serious responsibilities.
Things can get even more complicated if we take a look at other ways to invest in real estate. After all, whole companies can own real estate, too. Investors can buy stock in those companies or even bet on the real estate market more directly. You can invest in mortgages, indices that track the real estate market as a whole, and all sorts of other things. Complicated stuff!
The best option depends on the situation
Ultimately, these three or four ways of looking at real estate each have their pros and cons, and each may appeal to different people. A city dweller may look at prices and see that a down-payment on a property in their favorite neighborhood would lock up too much of their cash. For them, it might make more sense to rent, while using the cash to invest, offsetting the “wasted” rent payments. In the suburbs, someone might see that their mortgage payment could be lower than their current rent, even after a relatively affordable down-payment. In this case, of course, they’d buy. Companies and individual landlords of different sizes and means might see that they can spare the time and cash to make investments in rental properties or real estate-based investment vehicles on Wall Street. It’s all part of the complex real estate market!
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