Investment is a term used quite often, especially within business contexts. Making an investment could be simply explained as committing resources at a given point in time with the intention of gaining profit, or appreciation out of it in the future. The resources that would be committed as an investment shall generally include money, time, effort, assets et cetera. Simply put, an investment is any medium used in generating future income including stocks, bonds, real estate property or alternative investment options. An inherent nature of an investment is that it cannot be guaranteed to appreciate or earn a profit to the investor as expected. Although the earning potential could be reduced to some extent, diversifying investments could also reduce the risk to the investor.
Real estate is considered a lucrative and secure investment option compared to others. The category of real estate includes land and any other permanent man-made buildings. The sectors or subdivisions of the category are residential real estate, commercial real estate and industrial real estate. Factors such as diversification leading to reduced risk, greater potential for value appreciation, the benefit of an additional cash flow, building legacy, tax benefits, acting as an inflation hedge and the potential to generate passive income are among the key reasons that make real estate investments more lucrative. Any investor would show greater interest on diversified investments. The reason would be managing such a diversified investment portfolio would not only strengthen the investor in the form of a rainy-day fund and a source of mortgageable guarantee for emergency cash needs, but also reduce the overall risk involved. The ownership of a healthy and growing real estate portfolio shall also increase the net worth of an investor. It is noteworthy, that real estate investments are considered to be future proofing options with a higher ROI, especially compared to the risk it holds. The aforementioned, return (ROI) may generate in various forms. Over time, the value of real estate is deemed to appreciate. Land being a scarce resource is the reason for such an appreciation. In the long run, the value of a plot of land could appreciate immensely, enabling the investor in earning a much higher gain. Moreover, an extra source of income never hurts. Rent / lease income from a real estate investment is not just long term, but also a safety buffer against other regular income sources having a possibility of facing unexpected hits.
Apart from the multiple financial benefits, real estate is an investment for one’s family. Such investments are known to be ‘legacy-building’ investments, as it may pass from one generation to another in the years to come, with its value being appreciated. Being able to obtain tax benefits is another key reason as to why real estate investments are popular. It can offer tax benefits in the form of a deduction of mortgage interest and depreciation. Besides, acting as a hedge over inflation makes real estate investments more and more attractive. While keeping Sri Lanka’s current economic conditions in mind, it should be understood that, when the inflation is high, the real value of money decreases over time. Yet, the value of real estate tends to increase. When the annual inflation hovers above 50%, the investor would lose half of the potential income that could have gained if there was no inflation. This is one of the major reasons why majority of investors are moving away from financial markets. Hence, this could be the improved saving the investor could grab by investing in real estate, as the value of real estate is deemed to be ever-increasing. The potential to generate passive income is another key reason for its popularity over other investment options. Passive income is an income type that is unearned and gets acquired automatically. A minimum level of labor is employed in earning and maintaining passive income. In an organizational context, such passive income could be used to grow the business by investing in cutting edge technologies, hiring new staff, training and development or expanding production. They could also facilitate in qualifying for debt opportunities.
Having taken a look at the reasons for real estate investments being popular, it would also be prudent to consider the factors that make a property worthy of being invested in. The location of the property being a hot spot is a major factor contributing to it being investment worthy. An area sought after by renters with land and housing values appreciating would be a sensible option. The area being equipped with key amenities and conveniences is another sought after factor. In addition, the area’s crime rate, tax history and school ratings could also provide an investor with the insights prior to making an investment. The type of buildings / houses preferred by the residents / business owners in the area could lead investors to make better investment decisions catering to the prevalent need. Furthermore, having a close watch over the prices of properties being sold and the average price levels could also support informed investment decisions. An in-depth understanding of all of the above should nevertheless be put into action always remembering not to invest money you’d want immediately in real estate investments!