Many people, including many Muslims, connect the word “Halal” with the concept of food. On the other hand, as time passes, an increasing number of Muslims wonder if their investments are halal. This is also something to keep in mind when considering real estate investments. Any real estate investment that does not condone any Haram activities or trades is considered to be a Halal real estate investment.
There is no valid reason for a person to refrain from investing in real estate if they are practicing Sharia Law to the letter. Your investment portfolio should be diversified between high-risk and low-risk investments, as is typically recommended by financial consultants. Investing in real estate that complies with Sharia law is an excellent, low-risk alternative for investors. There are fundamentally two different approaches to investing in real estate.
- You have the option to buy REITs (Real Estate Investment Trusts). There are a few REITs that comply with Sharia law. As a result of the fact that you do not own the full property but rather a portion of it, you are eligible to receive dividends.
- You can buy real estate and then restrict its usage to Sharia-compliant endeavors, such as renting it out, purchasing and selling it, or engaging in commerce permitted by the religion.
The following discusses the advantages and risks of investing in real estate.
Advantages of investing in real estate
You won’t have to wait very long to get a return on your investment.
If you invest in real estate intending to rent it out to tenants, you will be able to profit from the rent that is collected from those tenants. Returns on investments can typically be obtained at a rate of 6% per year or higher, but this rate can go as high as 10% or even higher. Educating yourself on how to compute the ROI (Return of investment) would be advantageous. Keep in mind that the capital is the initial buying cost, which includes the price of closing, repairing, and maintaining the property and any additional charges. Any effective investment should generate sufficient returns to offset the ongoing expenditures involved. You may get more information on this topic right here.
Real estate investment benefits from capital growth
Land is a resource that is in short supply. The number of people in the world is consistently rising, which indicates that the value of this limited resource will, in most cases, increase as time passes. In addition to this, the land acts as a protection against price increases. The development of related infrastructure can also affect property values. There will be greater demand for real estate in a region if there is a rise in the number of people moving there due to an increase in the construction of facilities such as roads and social amenities. The increase in demand for a resource that has a finite amount will, by the rules of supply and demand, result in a price rise.
Leveraging the use of other people’s money
Since interest payment is prohibited under Sharia law, a Muslim cannot get a conventional mortgage loan from a financial institution. However, they have the option of obtaining a loan in the form of a Murabaha from an Islamic financial organization. Because of this, you can obtain a more significant market stake and, as a result, higher returns by using the money provided by the financial institution. With the help of Murabaha loans, you can purchase multiple homes at a comparatively modest cost.
In the world of real estate, equity refers to the amount of money you would receive if you sold your property and paid off your mortgage. If you rent out your house, you can put the money from the rent toward paying off the mortgage, which will increase your equity. For instance, let’s say you owe $400,000 on your Murabaha loan, but you own a house worth $500,000. Your present equity is one hundred thousand dollars. If a tenant pays you $30,000 in rent over a year, and you use the entire amount to pay off the loan, you now owe the lending company $370,000, and you only have $130,000 worth of equity in your property.
You are eligible for tax breaks and deductions
When paying taxes, you have many options for tax benefits and deductions. They are as follows:
- When paying taxes, you have many options for tax benefits and deductions. They are as follows:
- Property insurance
- Property tax
- Property management fees
- Mortgage interest
- Ongoing maintenance, property repairs, and capital improvements
- Advertising expenses
- Taxes on capital gains are due whenever an asset is sold for more than it was first valued, such as when a home is sold for more than its purchase price. In this scenario, you will be subject to the taxation of capital gains rather than the taxation of regular income. In most cases, the latter is subject to a higher tax rate.
- Costs subject to depreciation It is possible to depreciate the cost of the property over time if it is used for purposes that generate money, such as in a business. You can deduct the amount the house has decreased in value throughout its anticipated lifespan. You make a deduction for the annual decline each year to account for the wear and tear on the house as well as the typical use.
- Deductions for pass-through businesses and passive income The Tax Cuts and Jobs Act allows investors to deduct up to 20% of the net income from their pass-through businesses. This results in a 20% reduction in their rate of taxable income.
Risks of real estate investments
You need a lot of capital to start.
When compared to stocks or bonds, the amount of initial capital required to invest in real estate is significantly higher, regardless of whether or not you want to use financing to make your purchase. You may be required to make a down payment of twenty percent on the property, which does not include other charges such as taxes, closing costs, or repairs.
You are at the mercy of the property market.
Even while the price of real estate has a history of steadily climbing, this does not always guarantee that it will continue to do so in the future. Your investment will suffer the same losses that the property market does. If banks decide to boost interest rates, it will impact your income. The good news is that property values are not nearly as volatile as other investments, such as stocks.
Requires time, money, and effort
You will be responsible for the upkeep of your property and the management of your renters unless you choose to invest in REITs. Tenants can be a source of frustration, mainly if they cause damage to your property, engage in activities that are unsavory or illegal on your property, or fail to pay their rent. There will always be expenditures associated with the upkeep that needs to be paid, like taxes and fees for repairs, and there is no guarantee that you will always have tenants.
Despite the drawbacks, investing in real estate is often a good choice. You may find a home to buy and get started investing in real estate by using one of the many real estate listing services that are accessible online. Before you put any of your money into any property, you should definitely conduct some research beforehand. Many tips can be found online that will provide advice on what to do before investing.