Should entrepreneurs invest in real estate? This is a question that seems to be on the mind of many business owners. There are many reasons why investing in real estate can be beneficial, but there are also a few that may have you considering otherwise.
The general term real estate (also known as property) refers to any piece of land or space that meets two criteria:
- it can be owned
- it has value
When you own a property you have exclusive rights to its use. You also have control of that land/space, as long as you pay taxes on it. However, it’s important to note that the second criteria is dependent on market conditions.
Why do people invest in real estate?
Here are a few reasons to consider:
- earn an income by charging fees for the use and access of the space (e.g., monthly rent)
- complete significant renovations or build a new home design on the property to later sell for profit.
- hold onto land until the market increases and they can cash out the equity
- live in the income-generating property (multi-family). This allows them to live in the property and also generate income from it.
This is just a short list of reasons why people invest in real estate. However, this article will discuss how entrepreneurs might consider investing their capital into real estate if they are interested in doing so.
Income Generating Real Estate
Why would an entrepreneur want to look at buying income-generating properties?
In general, investment properties give you two ways to make money: cash flow and equity appreciation.
- Cash Flow refers to money put into a business in exchange for a steady stream of income. One must understand what kind of return on investment they can expect from their property regarding cash flow. In general, an investor will receive between 7-10% in cash flow annually.
- Equity Appreciation refers to the value of a property going up over time, allowing an investor to turn a profit by selling said property at a higher price than they initially paid. While this is not guaranteed, and there are no guarantees about how long it will take for the appreciation to occur, putting your capital into an equity-appreciating asset is unquestionably better than putting your money into an income-generating investment.
Some benefits of income-generating properties:
- As you receive monthly rent on your property, it can give you an additional source of income to live off. This strategy could be helpful while you focus on building your business. The cash flow is directly from tenants rather than the sale of the property so it won’t affect the appreciation of a property negatively.
- The longer you own a property and the more capital goes into renovations or new builds on said property, the more likely it will be that you can sell at a profit in the future for more money than what you put into it initially. In short, there’s potential for more significant returns when compared with equity appreciation.