Thinking of investing in real estate as part of your portfolio?
Here are 7 reasons why bricks and mortar continue to be one of the most robust investment asset classes
1. Strong Income
One of the key features of investing in real estate is its ability to provide a stable cash yield derived from rental income. Majority of the return generated from real estate is attributed to rental income. However, in a boom market, you can also benefit from capital appreciation further enhancing your total return on the investment. The steady rental income protects your investment in a downturn market when property prices are flat or decreasing.
2. Protection from inflation
Given that most real estate assets provide steady rental income, these tend to rise along with inflation and rising interest rates. The argument is that if inflation is causing prices to increase, then the interest rate will rise making it difficult for people to finance real estate purchases, hence more renters will be in the market increasing the demand and causing the rental rates to rise. Also increased prices of material due to inflation will translate into higher real estate prices. Hard assets such as real estate and gold are good at retaining their purchasing power during inflationary environment.
3. High tangible asset value
As an owner of real estate, there will always be value in your land, and value in your house. Other investments can leave you with little to no tangible asset value such as stocks. Stock prices can dip sharply or in worst case scenarios go to zero (e.g. Enron) and take a long time to recover. The chances of your real estate investment going to zero and not recovering from market corrections are highly unlikely due to its ability to provide a steady income
4. A great way to diversify your investment portfolio
When you diversify your portfolio, you spread out the risk. Real estate will serve as a safe tangible asset to mitigate the risk in your portfolio. Real estate has a low or negative correlation with other major asset classes such as shares and bonds. This means that real estate prices are independent of the movement of shares and bonds. If the correlation was high then the real estate prices would go down at the same time if share prices were going down. Because they move independently having an investment in real estate provide you protection from any market corrections where your share portfolio can decrease in value
5. Competitive risk-adjusted returns
Real estate is less volatile than shares and bonds, meaning they don’t fluctuate in price very often. Share and bond markets are very much like a roller coaster going up and down in prices any given day. This volatility is a measure of risk. The more volatile an asset the riskier the asset is. Hence asset returns should be evaluated in relation to the level of risk. Real estate is steadier due to its ability to provide stable income hence it is considered less risky than shares and bonds. To help you understand, let’s assume you have two assets that provide you with 8% return each, however asset A has much higher volatility then asset B. This means that asset A is providing you with a much lower return per unit of risk compared to asset B hence asset B is a better investment option. This implies that the addition of real estate to your portfolio can lower its volatility, provide a higher return per unit of risk and serve as a significant counterbalance to other instruments such as stocks and other securities.
6. You benefit from other people’s spending
Government expenditure on infrastructures such as roads and airports are likely to boost property prices in a suburb. Further, private and public investments in projects such as universities, hospitals, shopping malls, office complexes etc. provide employment opportunities, increase housing demand and in turn property values. Without you having to spend a penny.
7. Wealth Creation
Over time, strategically selected real estate investments can be powerful vehicles for wealth creation. History continues to show that the longer you hold on to your real estate investment, the more money you will make. Like any other asset class, the real estate market also goes through cycles where the prices fall- but given its nature real estate tends to recover faster and appreciate over time. There is a reason that almost 50% of the world’s wealth is tied up in real estate and its the largest asset class in the world, worth almost $217 trillion.
Competitive risk-adjusted returns, low volatility, strong income, diversification benefits and protection from inflation – real estate investment offers numerous perks. Before pinning down your investment, do your research, ask around and keep learning about the real estate world. However, you can be sure of one thing, real estate is definitely the best investment strategy!
