Real estate can be a good investment for many people, but it's important to remember that it carries its own set of risks and uncertainties. Like any investment, real estate can go up or down in value, and there is no guarantee of a return on your investment. That said, we're firm believers in the value of real estate investing. Here are 3 reasons why investors ought to consider owning real estate.
Short-Term AND Long-Term Potential
First and foremost, we're bullish on real estate investments due their potential to deliver short-term value AND long-term growth.
Over time, the real estate market has always shown steady growth. For the residential sector specifically, home values have always appreciated when you look at multi-year periods. Sure, the market has experienced its dips (e.g. 2008 mortgage crisis) but after a couple years it always rebounds. So if you're looking for a great place to park your money, an investment property makes a ton of sense. In California, the average rate of appreciation has been estimated at 6.77% annually over the 39 year time frame. Keep in mind, this is purely the asset value. The beauty of real estate is that it is able to generate short-term income too!
The passive income potential of rental real estate is what makes this asset class especially attractive. If you buy rental properties, almost immediately they provide a new cash flow via tenants paying rent. Contrast that with almost any other investment; dividends from the stock market or funding a new venture would take years to generate substantial cash returns.
You also have far greater optionality in how you monetize investment properties. Sure a rental property is the most straightforward; but it's not the only way. Maybe you are willing to be more hands on and want to avoid paying a property manager, or want to go the other direction and be completely hands off throughout the entire process.
For starters, if you're looking to be extremely hands on, you can live in your real estate investment -- making mortgage payments is always preferable to making rental payments... A smart real estate investor would certainly view their own living expenses as an opportunity to help their personal finance. Alternatively, if you aren't afraid of allocating more of your own money beyond your initial investment, you can make capital improvements to the property and pull off some rapid house flipping (there's a reason realestate developers do what they do).
On the other hand, maybe you don't even want to be bothered with any part of the work. You can definitely pay property management companies to handle tenancy, property taxes, and upkeep. You can even go a step further and invest your money in a REIT (real estate investment trust). These groups pool money from real estate investors to identify and acquire properties. Real estate investment trusts can own properties both within residential real estate and commercial properties, allowing for a great range -- something worth highlighting as our next point.
Diversification
The second major advantage of real estate investing is its ability to diversify your investment portfolio. It offers this ability in two ways.
First, real estate can also be a useful hedge against inflation, as the value of real estate tends to increase over time along with the cost of living. What does this mean? Well, when the prices of THINGS increase (gasoline, consumer goods, etc), so do home prices. This is the exact opposite of what the overall economy does during inflationary periods.
Periods of high inflation, on the other hand, often cause uncertainty, volatility and a slowdown in spending, leading to lower economic growth. - Forbes, 2023
When everything is expensive, people try to park their money in real estate and the values of properties rises. (Of course, when interest rates are slashed, buying real estate is also smart if you can lock into a low 30-year fixed rate mortgage that won't be available when the rates spike down the road). The rental a landlord can charge also rises during period of inflation. When almost every investment in your portfolio suffers; you'll want the counter-success brought by physical property.
The second way real estate brings diversity is due to how hyper local it truly is. While bonds and stocks and exchange-traded funds are available (and monitored) nationally, parcels of land are (somewhat) less subject to macro economic trends. Even if the national housing market is down, it doesn't mean that a house in a niche market in a specific city might not offer terrific ROI. Every local market has its own characteristics and nuances. Successful real estate investors know how to unearth these gems that are off the radar of the national experts and make shrewd real estate investments.
All the Cool Kids are doing it?
A final, brief reason to consider real estate investing is that it appears that a ton of top investment groups are doing it. While you should never merely go along with the crowd, it's worth seeing who's pouring their funds into investment property. Almost everyone, from BlackRock to the mom-and-pop private equity shops, is buying up real estate. (In fact, the surge in investment from institutional groups is often cited as a significant driver in real estate values). Sprawling apartment buildings to single family homes, smaller office buildings to massive commercial real estate developments -- we're witnessing institutional firms start investing in any real estate they can get their hands on. The days of Wall Street just pumping money into mutual funds or ETFs have passed; property that can generate rental income and a steady cash flow while experiencing price appreciation is the hottest asset in a wealth-building portfolio.
Conclusion
Investing in real estate can be extremely wise and lucrative. Property can generate passive income in a short timeframe, as well net a healthy return over a decade or longer. Real estate also helps diversify your portfolio and acts as a hedge against inflation. Also, since savvy investors have identified the real estate market as a prudent place for investment, perhaps you should too!
Of course, it's important to carefully consider your financial goals, risk tolerance, and available resources before opening yourself up to real estate exposure. It may also be helpful to seek the advice of a financial professional or real estate agent before throwing substantial capital at your first rental property.
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