The word Halal is associated with food by many people, especially Muslims. As time passes, however, an increasing number of Muslims are questioning if their assets are Halal. When thinking about real estate investing, this is also true. Any investment in real estate that does not condone Haram activities or trades is considered Halal.
There is no reason why you shouldn’t invest in real estate if you fully follow Sharia Law. Diversifying your portfolio between high-risk and low-risk investments is frequently recommended by investment advisors. Real estate investing that complies with Sharia law is a great low-risk choice. Investing in real estate can be done in two ways.
1. You can buy REITs (Real Estate Investment Trusts). Some REITs are Sharia-compliant. Because you do not own the entire property but only a portion of it, you are entitled to dividends.
2. You can buy real estate and use it solely for Sharia-compliant purposes like renting, buying, selling, or engaging in a lawful trade.
The following are some of the benefits and drawbacks of real estate investment.
Benefits of investing in real estate.
- Your investment will pay off right away.
If you buy a house and rent it out, you will be able to make money from the rent. Returns are typically around 6% per year, but they might reach 10% or higher. It would be ideal if you could figure out how to compute the return on investment (ROI) (Return of investment). Remember that the capital represents the total cost of the initial purchase, which includes closing costs, repair costs, maintenance costs, and other fees. Returns on a good investment should be sufficient to cover recurring expenses.
- Capital growth is beneficial to real estate investing.
The amount of land available is limited. Because the human population is growing, the value of this limited resource is rising. In addition, the land acts as a deflationary hedge. Infrastructure development has a direct impact on property values. More people will move to an area that experiences an increase in infrastructure construction, such as roads and social amenities, raising property demand. This increase in demand for a restricted resource will, according to supply and demand rules, result in a price increase.
- Taking advantage of the utilization of other people’s money
A Muslim cannot obtain a traditional mortgage loan from a bank since they charge interest, which is prohibited by Sharia Law. They can, however, obtain a Murabaha loan from an Islamic lending institution. In this situation, you use the money of the financial institution to gain a larger market stake and, as a result, bigger rewards. Murabaha loans allow you to purchase many properties for a minimal cost.
- Increase your personal wealth.
Equity in real estate refers to the amount of money you’d obtain if you sold your home and paid off your mortgage. If you rent your home, the rent can be utilized to pay off the loan and build equity. For instance, suppose you possess a $500,000 house and owe a $400,000 Murabaha loan. You have $100,000 in your account right now. If your renter paid $30,000 in rent in a year and you utilized it all to pay off the loan, you now owe the bank $370,000 and have $130,000 in equity.
- There are tax benefits and deductions available to you.
When it comes to paying taxes, there are several tax benefits and deductions available. You can deduct the costs of managing and operating the property, for example. You can deduct the following expenses:
- Property insurance
- Tax on property
- Fees for property management
- Interest on a mortgage
- Ongoing property upkeep, repairs, and capital improvements
- Advertising costs
• Capital gains taxes — You must pay taxes if you sell a home for more than it was originally worth. You will be taxed on capital gains rather than ordinary income in this situation. The latter is usually taxed at a higher rate.
• Depreciation costs — If the property is used for income-producing activities or for business, you can depreciate the cost over time. In other words, you subtract the house’s depreciation over its estimated life. You deduct the annual decline each year to account for the house’s wear and tear and average use.
• Passive income and pass-through deductions – Investors can deduct up to 20% of their net company income under the Tax Cuts and Jobs Act. This reduces their taxable income rate by 20 percent.
The drawbacks of real estate investments
- To get started, you’ll need a lot of capital.
Even if you want to invest in a house with a loan, the initial capital required is still significant when compared to equities or bonds. You may need to put down a 20% deposit on the property, which does not include closing charges, repair costs, or taxes, among other expenses.
- You’re at the whim of the real estate market.
The fact that the property market tends to rise in price most of the time does not imply that it will always rise. If the real estate market declines, so will your investment. Your income is affected if banks boost interest rates. The good news is that property values are less volatile than other assets such as equities.
- Time, money, and effort are all required.
You will have to maintain your property and supervise tenants unless you invest in REITs. Tenants can be difficult to manage, especially if they cause damage to your property, engage in unsavory or illegal activities there, or fail to pay rent. You’ll always have maintenance bills to pay, such as taxes and repair fees, and you can’t always count on tenants.
Aside from the disadvantages, real estate investing is a fantastic idea. You can utilize a variety of internet real estate listing services to find a home to buy and begin investing in. Before investing in any property, make sure you do your homework. There are numerous guidelines accessible on the internet that will advise you on what to do before you invest.