Many people, including many Muslims, associate the word Halal with food. However, as time goes by, more and more Muslims ask themselves if their investments are Halal. This is the case, too, when considering real estate investment. A Halal real estate investment is any that does not condone any Haram activities or trades.
If you are strictly adhering to Sharia Law, there is no reason why you should not invest in real estate. Investment advisors usually recommend that you diversify your portfolio between high risk and low-risk investments. Sharia-compliant real estate investing is an excellent low-risk investment option. There are two main ways of investing in real estate.
- You can purchase REITs (Real Estate Investment Trusts). There are some Sharia-compliant REITs. In this case, you don’t own property in its entirety but a share of it, so you are entitled to dividends.
- You can purchase actual property and ensure it is only used for Sharia-compliant activities such as renting, buying, selling, or practicing a permissible trade.
Below are some pros and cons of investing in real estate
Pros of investing in real estate
You can get returns from your investment immediately.
If you decide to buy a property and rent it out, you will be able to earn from the rent from the tenants. Typically, you can get returns at a rate of 6% per annum, but this rate can be as high as 10% or more. It would be best if you learned how to calculate the ROI (Return of investment). Remember, the capital is the initial buying cost, including the closing costs, repair costs, maintenance costs, and other charges. A worthwhile investment should provide enough returns to cover recurrent costs. You can learn more here about this.
Real estate investment benefits from capital growth
Land is a limited resource. The human population is continuously increasing, meaning that this scarce resource generally increases in value over time. Furthermore, the land provides a hedge against inflation. Property values are also affected by infrastructural development. If an area sees an increase in the construction of infrastructures such as roads and social amenities, more people will move there, increasing the demand for property. According to the laws of supply and demand, this increase in demand for a limited resource will lead to a rise in price.
Leveraging the use of other people’s money
A Muslim cannot take a typical mortgage loan from the bank as they demand interest, which goes against Sharia Laws. They can, however, take a Murabaha loan from an Islamic financing structure. In this case, you leverage the financial institution’s money to get a more significant market stake and, consequently, higher returns. Using Murabaha loans, you can own several properties at a relatively low cost.
In real estate, equity is the amount of money you would get from liquidating your property and paying off your loan. If you rent your property, the property’s rent can be used to pay off the loan, increasing your equity. For example, if you own property worth $500,000 and owe a Murabaha loan worth $400,000. Your current equity is $100,000. If your tenant has paid $30,000 in rent in a year and you have used all of it to pay the loan, you now owe the financial institution $370,000, and your equity is $130,000.
You are eligible for tax breaks and deductions
There are numerous tax breaks and deductions you can make when it comes to paying tax. They include;
- You can deduct the costs of managing and operating the property. Some expenses you can deduct include;
- Property insurance
- Property tax
- Property management fees
- Mortgage interest
- Ongoing maintenance, property repairs and capital improvements
- Advertising expenses
- Capital gain taxes – If you sell a house for more than it was originally worth, you are supposed to pay taxes. In this case, you will be taxed as capital gains rather than ordinary income tax. The latter normally has a higher tax rate.
- Depreciation costs – You can depreciate the cost of the property over time if it is being used for income-producing purposes or for business. In essence, you deduct the house’s loss in value over its expected life. Every year, you deduct the annual decrease to account for the wear and tear and average use of the house.
- Passive income and pass-through deductions – Through the Tax Cuts and Job Act, investors can deduct up to 20% of their net business income. This reduces their taxable income rate by 20%
Cons of real estate investments
You need a lot of capital to start.
Even if you intend to take a loan to invest in a property, the initial capital required is still high compared to stocks or bonds. You may need to make a 20% down payment on the property, and this is not counting closing costs, repair costs, and taxes, among other expenses.
You are at the mercy of the property market.
Just because the property market tends to increase in price most of the time doesn’t mean it is always going up. If the property market goes down, so does your investment. If banks raise interest rates, your income is affected. The good thing is property prices are not as volatile as other investments like stocks
Requires time, money and effort
Unless you invest in REITs, you will have to maintain your property and oversee tenants. Tenants can be challenging, particularly if they damage property, conduct unsavory or illegal activities in your property, or default on paying rent. There will always be maintenance costs to pay such as taxes and repair charges, and you are not assured of tenants all the time
Besides the cons, real estate investing is an excellent idea. There are various real estate listing services available online such as www.movoto.com; you can use them to find a home to buy and start investing. Be sure to do your research before putting your money into any property. There are many available guides online that advise you on what to do before investing.