Real estate has become a common investment vehicle over the last few decades. Investment real estate is real estate that generates income, or is intended for investment purposes rather than as a primary residence. It is a great investment for many reasons: amazing rate on return on investment, excellent tax advantages, ability to leverage real estate to build wealth. Today we’ll share with you 5 reasons why real estate is a great investment.
1 Real estate investments offer better and stable returns
Real estate generates returns that make it a different sort of animal in the investment game. Real estate always has a long-term perspective, and buying and holding is the most traditional strategy used for real estate investments. In other words, the risk of loss is typically minimized by the length of time your hold on to your property. The value of a property tends to appreciate as the market improves, and thus you build equity over time. In turn, it affords more stability than stocks and bonds.
Real estate is a tangible asset and will always be there – it represents less volatility, less risk and higher chances of returns compared to stocks and bonds. The risk in stocks and bonds never changes, and they may be negatively impacted by many factors that are beyond your control. In essence, real estate investments have inflation hedging capabilities against economic uncertainty, which would negatively affect the value of stocks and bonds. Thus, investing in real estate gives you more control over your investments. Furthermore, as economies expand, the demand for real estate drives rental prices higher, which in turn translates into higher capital values.
2 Real estate investments can be leveraged
Imagine this, a melaka apartment valued at RM 100,000 can be bought at only RM 20,000 in cash and a loan for the remaining amount. This is the power of leverage. Unlike stocks or bonds, where you will typically need the full amount in cash to buy its equivalent worth, real estate is an asset that can be leveraged. Furthermore, you can also secure multiple loans and grow your portfolio with only 20% cash in down-payments on each property. This method of conventional financing can be used to leverage your cash on hand, enabling you to purchase more properties and maximize your investment opportunities.
Furthermore, you can enter the real estate market at affordable entry points, and this offers good potential for further growth of your portfolio. In essence, you can leverage your property investments to capitalize on numerous revenue streams, while concurrently enjoying capital appreciation.
3 Real estate investments have physical form and natural value
Real estate assets are tangible and therefore have intrinsic value. They are backed by a high level of brick and mortar. We know of its value, we walk through it, we live in it, we can visualize how it might be used to generate returns: It is something we see every day. They are good for sellers because people can easily see their worth. For example, you can show the parcel you’re selling when flipping real estate.
This tangible factor also makes them good for buyers. Investments can be tricky business. When dealing with investments that you can’t see or feel, sometimes you don’t really understand it. What’s tough about investments such as stocks and bonds is that the average person often does not value them correctly. However, in real estate you can do your own research to determine value as well as find comparables to help you pin point purchase prices.
4 Real estate investments experience long-term appreciation
Buy and hold investing is one of the ways long-term wealth is built. Historically, the longer you hold onto real estate, the more returns you will generate. Although the real estate bubble tends to burst, which causes property values to slip, prices will always return to normal.
The amount of land available is limited and more land can’t be built. Thus, real estate is a limited commodity, and prices will rise when demand rises. This is what makes real estate a great investment.
5 Real estate investments diversify your portfolio
Real estate is one of the best ways to diversify away from the stock and bond investments most investors already have. Having a well-diversified portfolio is important in any investment strategy. Diversifying your investment portfolio helps spread out the overall risk from different markets and avoids portfolio volatility, as investments that rely more on income return tend to be less volatile than those that rely more on capital value return.
Real estate is a safe tangible asset that mitigates the risk in your portfolio and constitutes attractive investments for risk-averse investors. Real estate is thus a significant element of asset allocation, and should be a top priority component in any investment portfolio. What’s more, although most financial planners suggest a diversified portfolio, some investors have even built their wealth solely by investing in real estate.
The main drawback of real estate investment is illiquidity: the relative difficulty in converting asset into cash and vice versa. Unlike transactions in stocks or bonds, which are immediate, real estate transactions can take some time. Thus, with real estate investments, your money will be tied up. Finding a buyer, with or without the help of a real estate negotiator, can take weeks and months of work. And even after you have found the right counterparty, paperwork will likely chew up some time as well.
The Bottom Line
Real estate is simple to understand and like any investment, it can enhance the risk and return profile of your investment portfolio.