So what exactly is long-term real estate investing? In a nutshell, real estate investing entails buying properties that are likely to increase in value over the long term. Buying real estate for investment has similarities to other long-term investments such as bonds, mutual funds, or even cryptocurrencies. Many people think of real estate as a good long-term investment because there’s so much demand for it as an asset class. As long as the population continues to increase, demand for real estate will continue to increase and drive prices up.
With that being said, it’s important to understand how real estate investing works if you plan on doing it for any length of time. Here we’ll explain the different types of real estate investing and what red flags you should watch out for when looking to invest in properties.
What is long-term real estate investing?
Real estate investment has many variations, but the core idea is to buy real estate and rent it out to generate income. People who invest in real estate can do this in a few different ways:
#1 Investing directly in real estate – You can purchase real estate directly, like when you buy a property or building, or you might even own a percentage of it through a partnership or other structure:
- Active real estate investments are those that you manage and control. This could mean managing the property yourself or working with an investment manager.
- Hybrid investments combine some of the best features of active and passive real estate investments. They are meant to be managed, but you’re looking for passive returns.
#2 Investing in real estate through real estate investment trusts (REITs) – Real estate investment trusts are another type of investment people use to invest in real estate. These are issuers of trust shares that trade like stocks on exchanges. The value of the shares is backed by an underlying portfolio of real estate assets.
- Passive real estate investments are those you hold and watch the returns. Generally, these are backed by real estate trusts or mortgage-backed securities.
#3 Investing in real estate through mortgage-backed securities – If you want to go the indirect route, you can also invest in real estate via mortgage-backed securities. These are securities that contain mortgage loans as a backing.
How does investing in real estate work in the long term?
Real estate investing works best when you’re patient because it generally appreciates over time. Real estate appreciation is the difference between the purchase price and the sale price. It’s important to note that the purchase price is usually a long-term financing cost that you have to pay to buy the property.
Real estate appreciation is usually a function of market demand and supply. When there’s a high demand for real estate, it increases in value. However, it can also be based on local factors such as the quality of the property and the development of the local area.
The benefits of investing in real estate
Real estate investing is a long-term strategy, so it can be a great way to get your money out of the stock market while also offering the possibility of significant gains over the long term. Real estate has historically been one of the most reliable investments available. It typically has a very high expected rate of return while offering a very high level of safety.
Real estate is a time-tested strategy for wealth building. A strong real estate market can be a reliable source of long-term wealth. Real estate can also be a great way to diversify your portfolio. By investing in real estate that has different development paths and yield levels, you can reduce your overall risk.
Real estate also provides physical asset ownership. You can touch and see your investments, which can be helpful when making investment decisions.
Final Words: Should you invest in real estate?
Real estate investing is a long-term strategy, one that can generate significant returns over the long run. Because of the possible risk of real estate investing, it’s important to understand the benefits and potential pitfalls so you can make an informed decision.
Real estate investing is often referred to as an “investment in the future.” While this may sound appealing, it’s important to note that you’ll need to be patient and open-minded for it to work. Real estate can sometimes require a lot of time and effort to make a profit, so it’s not for everyone.
Click here for our complete Guide to Passive, Hands-Free Real Estate Investing.