Real estate investing is one of the time-tested cornerstones of wealth-building. It is among the most effective ways to create financial stability in the long term. However, achieving long-term growth and maximizing the potential of your investments takes skill and dedication. In addition, it requires strategic planning and careful decision-making.
Your responsibilities only expand and increase after you buy a piece of property. Successful real estate investments are all about understanding the business fundamentals.
Here, we explore ways to enhance the value of your properties and grow your portfolio’s worth. We begin with the fundamentals of real estate investment—the basis for building your portfolio. We then explore property selection and management techniques, practical tips for increasing your property’s value, and ways to reduce the hidden costs of real estate investment.
The Fundamentals of Value: Why invest in real estate?
There are several good reasons to invest in real estate. It can be a way to hedge against market volatility. When stocks plummet, real estate can keep the rest of your portfolio afloat. Real estate investment also carries many perks, including tax advantages, appreciation, and business advantages from activities that depend on the property.
Property appreciation
Real estate values generally increase over time. A well-selected investment can turn a significant profit upon selling. The prices of US homes grew 3.9 percent year-on-year (YoY) as of June 2023, following a 6.1 percent increase YoY in the previous quarter.
From 2020 to 2021, the US saw spikes of appreciation due to record-low mortgage rates. However, it’s important to note that US homes appreciate by 2 to 3 percent annually on average. Thus, the rates have gone back close to the average. While your rental property or home’s value may not appreciate as quickly as inflation within specific periods, it remains a valuable asset and investment.
Inflation hedge
The key to understanding property appreciation is to know how it moves against inflation. At times of high demand and low housing inventory, annual appreciation tends to spike. Inflation tends to drive real estate prices upward. This applies to all kinds of real estate, including commercial properties, single- and multi-family homes, and other investment properties.
Owning real estate protects against inflation in several ways. Firstly, property values may rise higher than the inflation rate. Secondly, the rents on investment properties may increase to keep up with inflation. Properties financed with fixed-rate loans also see the relative amount of their monthly mortgage payments decrease over time.
To illustrate this concept, a $1000 monthly fixed mortgage payment becomes less burdensome as high inflation erodes the purchasing power of the same amount.
Many real estate investors consider the combination of rent hikes and property appreciation as a winning combination, allowing them to sit back and watch their investments grow.
For people who keep their wealth in cash, inflation can pose a severe problem. Excessive money printing reduces the purchasing power of the dollar. However, for real estate investors, the opposite occurs. Inflation can be seen as a wealth-building tool, amplifying the benefit of preserving the value of their portfolios.
Diversification
Real estate negatively correlates with other major asset classes. It has a weak-to-negligible correlation with stocks. It has a nearly negligible negative correlation with the US bond market.
Purchasing real estate properties and adding them to your portfolio can lower your portfolio’s volatility. Moreover, it provides a higher return per unit of risk.
Note, however, that REITs are different. They are stock-based assets. Even if you are investing in the real estate sector in the broader sense, you are still investing in a stock market-based asset. REITs have a moderate to high positive correlation with stocks, so making the distinction is essential.
Leverages your investments
Investing in real estate produces leverage. Leverage uses borrowed capital or debt and financial instruments to increase the potential ROI or return on investment. For example, a standard 20 percent down payment on a home’s mortgage gets you 100 percent of the entire house.
As real estate or property is tangible and can be used as collateral, financing is readily available.
Wealth-building tool
As investors pay down mortgages, they build equity. The asset you buy becomes part of your net worth. As you build equity, you gain the leverage to buy more properties. This leverage allows you to increase your cash flow and purchase more real estate.
How To Improve Your Real Estate Portfolio’s Value
Once you’ve acquired a property, the real work begins. The following strategies can help you increase the value of your property portfolio:
Be hands-on
While real estate represents passive income, it is not synonymous with being passive with your investments. It is possible to delegate administrative or daily tasks.
However, important business and strategic decisions must remain in the hands of the owner or lead investor. A hands-on proprietor can identify potential issues quickly and take steps to address them early on.
Location matters
Conducting thorough research on demographics, market trends, and economic conditions provides valuable insights into potential growth areas in the property sector. Do not underestimate the power of location.
Pick out regions near transportation, good schools, increasing job opportunities, and growing infrastructure development. Selecting properties in such areas may result in long-term appreciation of your investments.
Keep a positive cash flow
Cash flow is regarded as the lifeblood of real estate investing. A positive cash flow is when the money going into your business exceeds its expenses.
In the real estate industry, cash flow can be calculated in terms of long-term market value appreciation and the rent collections from tenants versus the cost of maintaining your property.
An increased cash flow helps lessen your capital requirements. You can compensate for unforeseen expenses like repairs when you generate enough rental revenue.
Invest in property maintenance
Regular and careful maintenance is essential to preserving the value of your property portfolio and attracting high-quality tenants for your rental property.
One of the most overlooked aspects of property maintenance is pest control, which is essential in densely populated areas.
Hire a reputable pest control company to oversee the inspection and treatment of your properties. A trusted pest control expert like Orkin combines advanced technology and methods to prevent infestations and protect your property in the long run.
Add value through amenities
Home upgrades and features like customized kitchen cabinets, energy-efficient windows and appliances, smart technology, specialized bidet toilets, exterior decks, retractable motorized patio screens, and luxurious bathrooms add a distinctive touch to your property, allowing you to attract higher-paying tenants or command better resale prices. Be sure to crunch the numbers and be selective about which improvements generate the most returns.
Brush up on strategic marketing
Brushing up on your marketing skills can significantly affect how much you can rent or sell your property. Marketing improves perception. Learn to write compelling descriptions, take professional photos, and use online platforms to your advantage. Hire the right people when necessary. As you expand your portfolio, marketing becomes increasingly important.
Focus on cheaper properties
To increase your real estate portfolio, look for undervalued properties without compromising quality. The ideal price range for such buys is about 20 to 40 percent below the median price for its location. Expect to invest in upgrading the property to ensure maximum profit as you put it back on the market as a rental.
To Boost Value, Be Proactive About Your Property Investments
Increasing your real estate portfolio’s value requires mastering the fundamentals that impact its worth over time. While real estate is considered a source of passive income, investors must be involved in the continual upkeep, maintenance, and management of a property portfolio. They must also be keen about the tax implications, hidden costs, and market trends that govern the sector.
Furthermore, they must understand how inflation rates and economic fluctuations affect their investments and act accordingly.
Property is a dynamic sector. Thus, you need a keen eye for investment opportunities to boost the value of your real estate portfolio. You must allocate resources to high-growth locations and spend on crucial upgrades that you convert your properties into winners.
When you are proactive about property maintenance, renovations, and marketing, real estate investing can be a lucrative and rewarding endeavor, regardless of your experience as an investor.