You might have heard the saying, “They’re not making any more land,” and it’s true. Investing in real estate is smart, because although the value of the property might fluctuate in unstable markets, the value of land will never depreciate. But there are other reasons to invest in real estate that you probably haven’t thought of yet. Here are just a few of those reasons:
- Future Income Stream
When you make a real estate investment, you’re actually purchasing a stream of future income. Accruing rental income over the long term creates a significant proportion of total return. If your initial short-term goal was to fix and flip a property to sell it at a profit, and you have a hard time finding a buyer, you can always rent it out instead. Doing so will give you a fixed monthly income, and if you hire a landlord or property manager, you can sit back and forget about it.
- High Tangible Asset Value
Unlike stocks and bonds, an investment in real estate is backed by brick and mortar. Its tangibility and physical presence reduce the principal-agent conflict, or the extent to which you rely on the competency of investment managers and debtors to handle your funds. Many real estate regulations mandate a minimum percentage of profits to be paid out as dividends, so you can worry less about seeing your money come back to you.
- Inflation Hedging
An inflation hedge is an investment that provides protection against the decreased value of a currency. Typically, it involves investing in an asset that is expected to maintain or increase its value over a specified period of time. Real estate offers inflation hedging due to its relationship between Gross Domestic Product (GDP) growth and demand. As economies expand, the demand for real estate drives rents higher which, in turn, translates to higher capital values. For that reason, real estate investments tend to maintain their purchasing power, passing on some of the inflationary pressure on to tenants in the form of capital appreciation.
- Competitive Risk-Adjusted Returns
Risk-adjusted return refines an investment’s return by measuring how much risk is involved in producing that return. Real estate investments have low volatility, meaning they’re less likely to shift wildly and unpredictably. The relatively consistent market, stemming from infrequent real estate transactions and third-party prop erty appraisals, results in stable pricing and leads to smooth returns.
- Easy Financing Options
When you purchase a stock or bond, in most cases, you’ll need the money upfront. Such is not the case with real estate investments. There are a variety of ways to finance your property purchase, including, but not limited to: cash, conventional mortgage loans, and hard money lenders. The best choice for you might depend on the location of your property. For example, in competitive markets such as Southern California, buyers should research Anaheim hard money lenders for a quick and easy close. Alternatively, in states with high taxes and interest rates, buyers would benefit from cash transactions or conventional loans.
- Portfolio Diversification
Whether you’re a seasoned investor or just getting your toes wet, you’ve probably heard the term ‘diversification’. Financial advisors recommend diversifying your investment portfolio; this helps you avoid the risk of placing all your eggs in one basket. Real estate has a low correlation with other major asset classes, and by adding that investment, you can lower portfolio volatility and find a higher return per unit of risk.
- Psychological Advantage
If you’re comparing real estate to other forms of investment, consider the psychological advantage. Real time markets are vulnerable to sudden and unexpected shocks, seen in the ‘Flash Crash’ of May 2010, when $1 trillion in stock market value was erased in just 15 minutes. Watching stocks, bonds, or equities rise and fall can be incredibly stressful, and knowing when to pull your money out takes experience, knowledge, or advice from someone you may or may not be able to trust. Real estate investments offer a greater peace of mind in an environment where office volatility is an issue and the dynamics of algorithmic trading are murky.
Ultimately, the bottom line is that real estate makes a distinct, easy-to-understand asset class. Evaluate these various benefits to see how real estate is undeserving of its tarnished reputation.