Investing in real estate has the potential to be a very lucrative and generally safe way to diversify your assets and grow your wealth. While housing prices in and of themselves are unlikely to beat the stock market based on historical trends, when done right the income and asset growth generated by a real estate portfolio can surpass anything you could hope to achieve by investing in stocks. Experienced developer Craig Nassi takes the time to briefly outline what investors need to consider before establishing their own portfolio.
The Benefits of Building a Real Estate Portfolio
Investing in property comes with several distinct advantages according to Craig Nassi, who began constructing his own highly successful real estate portfolio in 1994 with the launch of BCN Development.
For starters, Nassi cites the fact that you can use considerable leverage to finance your housing investments and begin growing your net worth, putting down as little as 10–20% of the home’s purchase price initially (for rental properties, the figure is usually 20%). If you renovate a home and then revalue it, you can typically recoup that 20% down payment at the cost of the renovations (which will be about half that amount or less).
You will also be capable of generating income from a property quickly (depending on your plans for it), which can further speed up the process of reinvestment, allowing you to rapidly expand your portfolio of properties. Home buying also comes with several tax advantages, including the ability to write off the interest on your mortgage(s).
The Challenges of Real Estate Investment
Building a real estate portfolio does come with some of its own unique challenges however says Craig Nassi and requires a lot more work than simply putting money into a stock and passively watching it grow in value.
If the property will be a rental, you will either need to hire a property manager or firm to oversee it or handle those duties yourself. You will also be responsible for handling maintenance issues and insurance costs. Aside from its income potential, real estate is also a rather illiquid asset. You can generally cash out of most investments within a matter of days or weeks, but with real estate, it could take months before you can sell it.
Craig Nassi on Building the Right Portfolio
Your level of risk tolerance, as well as the time horizon and objectives for your investment should be deciding factors in what type of property you invest in.
One of the biggest considerations is whether you are after short-term cash flow or long-term value appreciation. Traditionally, more expensive houses will appreciate more over the long-term, though the increase in rental prices compared to a cheaper property is not typically commensurate, lowering their effective cash flow generation.
Craig Nassi notes that more recently, entry-level homes have been gaining value quicker in many major U.S cities due to a lack of inventory, though he does not expect that trend to persist for much longer. Nonetheless, that makes them a great option for starting a real estate portfolio and introducing investors to the exciting and rewarding process of home buying, renovating, renting, and reinvesting.