Few people, though, carry this line of reasoning to real estate ownership as an investment only. According to IRS data, only 7% of US citizens own rental homes. In the current real estate market, it is undoubtedly difficult to afford even one house, much less several.
The majority of investors, however, believe that even real estate investing techniques with minimal entry barriers are unimportant. Only 3% of Americans actively purchase shares of publicly traded REITs or real estate investment trusts.
You’ve come to the right place if you want to diversify your holdings but are still unsure whether or not real estate investing is suited for you. We’ll go over some of the fundamentals of real estate investing in this article so you can decide if it’s suited for you.
What advantages might buy real estate provide?
What benefits may real estate bring to a portfolio of investments? There are numerous benefits. Let’s start by discussing the various ways you might profit from real estate.
Multiple return streams
Real estate can result in profits in both income and value. Each month, rent from tenants is collected and used as income. Appreciation occurs over time as the property’s value increases. Prices for residential and commercial property can vary from year to year, but over the long run, they have both increased significantly.
This brings up the second advantage of real estate ownership: stability. Real estate has traditionally been a considerably less volatile investment than stocks and typically provides better returns than bonds. To this stability, several things contribute.
Those who hold real estate directly or through a private fund primarily gain from investing in it because “unlisted” real estate assets, or those not listed on a stock exchange, are more volatile and less insulated from market swings that affect share values. Generally speaking, publicly traded REITs have outperformed the larger S&P 500 index.
Bonds and stocks frequently respond poorly to inflation. Property yields, however, might go up as prices go. This does not imply that real estate is shielded from inflation’s consequences. Budgets for construction and remodeling can be impacted by higher labor and material expenses.
Similarly to this, increasing interest rates can make it harder to finance new business deals. As previously mentioned, these expenses may usually be covered by increased rent for tenants (as long as the GDP and salaries continue to increase). Residential real estate and a few lengthy business agreements anticipate rent increases that correspond to inflation.
The two main components of most investment portfolios, stocks and bonds, can both be replaced by real estate, which is a great tool for portfolio diversification. The former generates the majority of capital growth over the long term, while the latter offers a steady base income.
In other words, solid real estate cash flows can provide lagging bond rates with a much-witheedneededft when bond yields are low, as they have been for more than a decade, as rental income collections can produce consistent payments akin to the return on a mortgage.