Real estate investing for beginners

You're working hard on your financial future to avoid surprises later. But are you currently doing this in the best way? Aren't you taking too much risk by putting everything into stocks, for example?

Whatever your current strategy, real estate has historically proven to be a valuable way to build consistent wealth. We'd like to explain the advantages, disadvantages and risks of investing in real estate and show you how real estate can help you achieve your financial goals.

Advantages of real estate

1. Passive rental income

The beauty of investing in real estate is that you get rental income every month. This is a stable, passive source of income that often grows with inflation each year. With that rental income, you can pay expenses, such as the mortgage or maintenance. What remains is profit. You can use that to buy more properties or shares.

Rental income is a bit like dividends you get from stocks or ETFs. The difference is that rental income tends to be more stable. With companies, dividends can change or even stop, such as due to poor results. With real estate, you know better what to expect.

Still, there are also risks. Sometimes a property is empty and you earn nothing. You can limit this by buying properties in areas of high demand or by taking out long leases. That way you know in time when you need a new tenant.

This is a stable, passive source of income that often grows with inflation each year.

2. Increasing capital growth

You can use real estate to grow your capital in several ways. The most obvious form is the increase in your home value due to population growth and inflation. The tighter the housing market, the more valuable your investment becomes. In addition, smart renovations can also greatly increase the value of your property.

3. Diversify your investment portfolio

Real estate is a good addition to your investment portfolio because it has historically low volatility and provides more stability. This is because you know exactly what is going to come in each year, and by approximately how much real estate is going to increase in value, whereas stocks can fluctuate several percentage points each day.

Since real estate has a low correlation to stocks, it is therefore a perfect addition to your ETF or stock portfolio

4. Inflation-proof

The impact of inflation on your investments is an important consideration when making your investment choices. Real estate, based on historical data, has always weathered the effects of inflation well.

A major reason for this is that construction costs for new real estate increase due to inflation. This increases the value of existing real estate as replacement costs increase.

In addition, almost every lease allows you to adjust rents annually to account for inflation or recent wage increases. This makes real estate an effective hedge against inflation, allowing your investment to retain its value and even grow should, for example, there also be a shortage as is currently the case in the Netherlands.

Based on historical data, real estate has always weathered the effects of inflation well.

Risks of real estate

As with all other types of investments, there are some risks associated with real estate. Fortunately, these are easily manageable and the risk can be mitigated. The main risks are vacancy and rising costs of maintaining and managing the property. In addition, it takes a large sum of money just to finance a project.

1. Vacancy, decline in demand, changing laws and regulations.

When investing in real estate, you run the risk of vacancy. Tenants come and go, which means there may be periods without rental income. In addition, non-payment by tenants can be a problem. In such cases, you continue to bear the cost of the property without generating income. Should you not take this into account, it can suddenly cause additional costs.

Furthermore, economic developments, such as the corona pandemic with mandatory store closures and less use of offices, can affect the demand or rental prices of your real estate. Changing laws and regulations can also have an impact on your returns, such as the recent Affordable Rent Act, which can put significant pressure on your returns.

Fortunately, there are ways to mitigate these risks, such as entering into long-term leases, investing only in properties in popular locations such as downtown or by taking multiple tenants in 1 property. This spreads the risk of not receiving rent for a period of time and provides a passive income stream.

2. Costs of property management and maintenance

As a property owner, you are also responsible for maintenance and financial management. This means you have to do or outsource the rental, administration and maintenance. Not only can this cost you a lot of time, but it also requires you to be knowledgeable. Should you not feel like doing this, you can also choose to outsource it, you just have to consider giving up 5-10% of the rental income which lowers your return.

3. High entry capital

To invest in real estate you need a large sum of money. It varies by type of property, but for regular rentals, take into account at least 30% of the purchase price to get a mortgage. You also have to take into account the purchase and possible renovation costs.

A major disadvantage of investing in real estate is that your money is tied up for a long time. This is because in order to get your investment back, you must first sell the property. If the market is not favorable at that time, this can be very disadvantageous. Unlike stocks, which you can sell at any time, real estate therefore offers less flexibility.

A major disadvantage of investing in real estate is that your money is tied up for a long time.

4. Cluster risk

When you diversify little, for example by investing a lot in one type of real estate or in one region, cluster risk can arise. This leaves you vulnerable to market fluctuations and local changes that affect the real estate market. To avoid this, it is important to spread your investments across multiple projects or by putting some of your assets in ETFs or stocks.

Different types of real estate

Buying a house or condo to invest often requires a large sum of your own money, and that can be a challenge. Fortunately, there are other ways to invest in real estate. With these alternatives, you can enjoy the benefits of real estate without spending a lot of time, effort or money. To give you an overview of what is possible, we have listed the best-known ways to invest in real estate.

Buying real estate yourself

Would you prefer to buy a property to rent out yourself? Then you can often arrange much of the financing through the bank. Banks usually cover 70 to 80% of the costs, but you have to put in 20 to 30% of your own money. For a €200,000 home, this comes down to an own investment of €40,000 to €60,000, excluding purchase and possible renovation costs. Platforms like Funda and Dwello make it easy to find an investment property in the Netherlands. Should you be up for real estate in Spain, you can visit the largest Spanish real estate platform Idealista.

Buying real estate is for many people quite an investment, you have to take into account that the return is still very uncertain and buying and renting a property requires a lot of time. You have to think about market research, managing the property and keeping the financial records. So it is important to read up and prepare well before taking this step.

Real estate bonds

Real estate bonds, on the other hand, offer a more accessible way to invest in real estate without the responsibilities that come with buying it. Companies like Valvest.io issue these bond loans to raise money for projects, such as renovations or renting out their (vacation) homes. With a minimum deposit of just €100, you can often participate and enjoy the benefits of real estate.

For example, real estate bonds offer not only an attractive fixed return, but also various securities. Consider, for example, a first right of mortgage or an option on rental income. These securities make the loan similar to that of a mortgage that a bank provides when buying a home. This provides the added guarantee that you will get your money back (mostly) even if the real estate market declines in value.

Another big advantage is that the return is stable, since it is covered by the rental income from the underlying property. In addition, you can decide which projects you want to participate in and thus maintain a good overview of your holdings. Any company that offers real estate bonds must also comply with strict legal regulations, which gives extra assurance to you as an investor that what is being offered is actually correct.

It is important to keep in mind, however, that your money is often tied up for a longer period of time (3-5 years) when you invest in real estate. This makes real estate bonds ideal for those looking for a relatively safe investment with stable returns over the long term.

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) are publicly traded companies that invest in various real estate projects, such as offices, shopping centers and homes. This allows you as an investor to participate in the real estate market even with a small amount of money. A major advantage of REITs is their liquidity: you can buy or sell your position at any time, just like with stocks.

A disadvantage, however, is that you have no control over which projects are included in the fund. This means that you can invest indirectly in real estate projects in which you yourself have less confidence. Thus, REITs are especially suitable for investors who value flexibility but attach less importance to direct control over their investments. In addition, a REIT often charges up to 2% commission to pay its employees, which comes at the expense of your returns.

Real estate ETFs.

Real estate ETFs (Exchange-Traded Funds) are mutual funds that track a broad selection of stocks of real estate companies or REITs and are traded on the stock market. Like REITs, real estate ETFs offer a low-threshold way to invest in real estate, with the advantage that you can easily buy and sell because of liquidity.

Yet real estate ETFs also have limitations. They offer little transparency about the specific projects in which the fund invests. Moreover, returns depend on the performance of the real estate companies and REITs in the fund. This means you have no control over the stability of the return; dividends can fluctuate and are not always the same on a monthly basis.

Real estate ETFs are an interesting option for those who want broad real estate exposure but place less importance on predictable income or insight into the underlying projects.

Crowdfunding

Crowdfunding platforms allow you to invest in real estate projects with a small amount of money. This gives you the chance to spread out across different projects, which allows you to better manage risk. The promise of high returns makes this option attractive to many investors.

Yet real estate crowdfunding also carries significant risks. The biggest problem is often a lack of transparency about who the developers are and how trustworthy they are. Unfortunately, in practice, projects are sometimes not completed or you don't get your investment back (in full).

Although crowdfunding offers an accessible way to get into real estate, it is important to look critically at the reliability of the platforms and projects. The higher risk requires extra care when making a choice.

Conclusion

Investing in real estate is an excellent way to add diversification and stability to your portfolio. As you have read, there are several ways to invest in real estate, each with its own advantages and disadvantages. Which option suits you best depends on your financial situation, risk acceptance and personal preferences.

Are you interested in real estate bonds? At Valvest we would be happy to help you and tell you more about the possibilities.