Top 7 Reasons Why People Choose to Invest in Real Estate

The latest Economic Survey 2023, released in May by the Kenya National Bureau of Statistics (KNBS), paints a compelling picture of where Kenyans are investing. The survey shows Kenya’s construction sector grew by 4.1% in 2022.

Even though this growth was lower than the 6.7% registered in 2021, it outpaced many other sectors, including services, manufacturing, agriculture, and equities. 

These stats show that many people have been opting for real estate as their preferred investment vehicle instead of traditional ones such as manufacturing and agriculture. 

Real estate has been the go-to investment vehicle for many Kenyans. According to Nation Media Group, real estate reportedly accounted for 40% of most rich Kenyans’ investment portfolios in 2022. 

But what is pushing people to invest in real estate?

This article will explore seven reasons why people choose to invest in real estate. 

Read Also: 9 Ways of Owning a Home In Kenya

It Offers a Wide Variety of Opportunities 

Real estate investment is appealing to a wide range of individuals due to its diverse opportunities that cater to various goals and needs. 

Residential properties, such as houses and apartments, serve both as a place to call home and an investment. People buy homes for personal use, generate rental income, or even sell them later for a profit. They can also provide a sense of security and comfort to you and your family.

Then, there are commercial properties. These can serve as sources of rental income or be developed for various businesses, making them excellent options for those seeking stable returns.

You can also invest in undeveloped land, which offers unique potential. It can appreciate if it's in the right location and increases your net worth, or you can develop it for various purposes like agriculture, residential, or commercial.

You can also get into real estate as a property flipper. This is all about buying a property, renovating it, and selling (flipping) it at a higher price. It's exciting and profitable but requires expertise and a keen eye for market trends.

Finally, there's Real Estate Investment Trusts (REITs) are a hands-off option for investing in real estate. A REIT is created when a corporation (or trust) pools investors’ money to purchase and operate rental properties. REITs are bought and sold on the Nairobi Security Exchange. They offer ownership in real estate ventures without the hassle of property management.

Read Also: Can You Own a Home in Your 30s?

It Is Considered Simple Compared To Other Investments 

Investment products can vary widely in complexity, and several factors make an investment product easy for investors to understand and use. Real estate has several factors that might make it relatively simple compared to other investment options. 

First, real estate investment does not demand an extensive background in finance or investing. You can begin your real estate journey with a basic understanding of property values and rental income and gradually acquire knowledge over time. However, basic knowledge is crucial when getting started to avoid getting conned when buying land or a house. 

Second, real estate investment often seems more accessible to many individuals than other investment vehicles like stocks or bonds. This is because as far as you have the capital needed, you can buy land, house, or any type of property. Additionally, it can be leveraged. More on this below. 

Getting into real estate can be financially challenging for low-income individuals. However, they can start with relatively little capital, especially when considering options like real estate investment trusts (REITs).

Thirdly, real estate offers various levels of involvement to suit different preferences. For those looking for a more hands-off approach, options like REITs allow you to invest in real estate without directly managing properties. And if you own the property, you can outsource the management. However, this approach can eat into your profits as it can be costly.  

It Can be Leveraged 

Investing in real estate can be done through leveraging. This unique feature sets it apart from other tangible assets like gold. 

Leveraging involves using borrowed money to finance property acquisition or construction, usually through a mortgage or home loan. This strategy can allow investors to control a more valuable asset with a relatively small upfront investment, typically a down payment ranging from 5% to 20%, depending on your creditworthiness and lender terms.

Leveraging offers several advantages. 

• It allows for equity building rather than paying rent, as mortgage payments contribute to property ownership. 
• Investors who use mortgages for rental properties can generate rental income, potentially building equity while opening up new sources of income. 
• Real estate owners can leverage their property to unlock "dead capital" by borrowing against their home's equity.

While leveraging can expedite homeownership goals, it comes with some risks. Mortgages accrue interest, which can result in higher overall costs compared to cash purchases. Defaulting on mortgage payments can lead to the loss of the property and more significant financial losses through penalties.

Read Also: Thinking of A Mortgage? Here's What You Can Do Now to Prepare 

It Can Complement Your Retirement Planning

Investing in real estate offers the prospect of generating income for retirement and building wealth. 

For starters, you will have a house to live in when you retire, and this can eliminate the need to worry about rent expenses, potentially freeing up your budget. At the same time, the house will likely represent a chunk of your net worth. You can free that capital through leveraging to start a small business if need be. 

Additionally, you can invest in real estate to generate income in retirement. This can be through rental properties or REITs that pay dividends. 

Nonetheless, it's worth considering diversifying your retirement strategy to avoid overreliance on real estate as they've their downsides. Property values may depreciate over time, impacting overall returns. They can also be illiquid, and time-consuming to manage, and unforeseen expenses /repairs can eat into potential profits.

It Can be Hedge Against Inflation

Investing in real estate can hedge against inflation in several ways. For one, properties often appreciate during inflationary periods due to increased demand. As the value of the shilling decreases, people turn to tangible assets like real estate, driving up its value.

Another factor to consider is the way rent typically rises with inflation. Landlords often adjust rental rates to keep pace with the increasing cost of living. This can provide a reliable source of income. However, if you own commercial buildings such as office blocks, tenancy can fall if inflation metamorphoses into a recession. 

Inflation also impacts the cost of building new properties. As the price of raw materials and labour escalates, it becomes more expensive to construct new buildings. This can increase the price of existing real estate, which is particularly beneficial for property owners.

Finally, real estate investments are not directly tied to the stock and bond markets. This means that even if these financial markets are struggling during inflation, real estate can continue to perform well, diversifying your investment portfolio.

It is important to remember that the location of your property, the supply and demand of real estate, and the overall economic health can impact property values during inflation. For instance, demand for luxury properties can decline. 

Read Also: Inflation is Your Biggest Enemy in 2023: 6 Smart Ways to Invest Your Money 

It Tends To Hold Its Value Well Over Time

Real estate often appreciates, making it a favourable long-term investment. Historically, property values tend to rise, making it a reliable store of value.

Real estate can also offer financial stability due to its lower volatility compared to stocks or other investments. While there may be fluctuations in the market, real estate tends to have a more steady and predictable growth pattern, which can provide a sense of security for low-risk tolerance individuals.

As the population grows, the demand for land and property will persist. This reliable demand contributes to real estate's ability to hold value over the long term.

Lastly, well-constructed properties can stand the test of time. A properly maintained home can serve as your residence for decades, and the cost of maintenance and renovations can often be more affordable than renting over the same period. This makes it a tangible and usable asset that contributes to your net worth.

While real estate typically holds its value over time, some circumstances can lead to depreciation. Factors such as urban blight caused by economic decline in your area, natural disasters or poor maintenance can lead to your property losing value. Additionally, in the event of a significant emergency, the illiquid nature of real estate can result in selling at a loss.

It Can Be Passed On To Future Generations

Real estate has a unique quality that sets it apart from other investment vehicles - it's tangible. This means you can pass the physical asset to your dependents that they can use. For instance, won't have to worry about paying rent, and your heirs can enjoy a sense of security and permanence. This can give them a head start in life.

Real estate investments can also provide a consistent stream of rental income, offering practical financial support to your heirs after your demise. Unlike some investments that might be subject to market volatility, rental income tends to be steady, ensuring a reliable source of funds for your loved ones.

Another advantage of passing down real estate is its ease of transferability and tax advantages. For instance, KRA does not charge capital gains taxes when real estate is passed on to family members. This makes it an attractive option for preserving wealth and providing for future generations.

Despite its advantages, real estate can also pose certain risks in estate planning. For instance, if your heirs don't have money to maintain the property, it can easily deteriorate and lose value. Therefore, it is important to diversify your plan by leaving other income-generation ventures for them. Additionally, inherited property can sometimes lead to disputes or conflicts among family members regarding its management, use, or eventual sale. Therefore, ensure to write a will to avoid these cases.

Read Also: Estate Planning 101: 4 Ways You Can Get Your Affairs in Order 

WRAPPING UP

As you've read, real estate investment can be a promising avenue for wealth building and financial security. However, the road to success in this field has its challenges.

Before taking the plunge into real estate, do your due diligence and thorough research at every stage. For instance, it is crucial to understand the local market, property values, and potential for growth or decline. Here, you can consider enlisting the expertise of real estate agents and legal professionals who can guide you through the intricacies of transactions and contracts.

Finally, diversification is also a key strategy for safeguarding investments and spreading risk. While real estate can be a solid choice, don't put all your eggs in one basket but rather explore other investment opportunities simultaneously.