The current fiscal year presents a very mixed picture of the global economy, with the risks of a recession looming for some major economies around the world. According to the International Monetary Fund (IMF), countries that recovered more quickly from the effects of the pandemic will be in a stronger position compared to countries that are still struggling to overcome the economic effects of COVID-19.
Unemployment, high inflation, and turbulence in the global financial markets paint a rather bleak picture of the future. On the positive side, however, there are some assets that can save one from an economic crisis. With significant losses in stocks and bonds, there is still one particular asset class that can bring positive returns: real estate.
Graana.com describes the key reasons why one should invest in real estate below.
Investing in Real Estate
If you are either looking to make your first investment or expand your portfolio, the range of choices – from stocks and bonds to gold, crypto, and even the metaverse – can make it too overwhelming to decide.
The following are the major reasons why real estate can be an excellent investment opportunity as compared to others.
Real Estate Appreciation
Real estate investors make money through rental income, any profits generated by property-dependent business activity, and appreciation. The value of real estate tends to increase over time, and with a good investment, you can turn a profit when it’s time to sell. Rents also tend to rise over time, which can lead to higher cash flow.
You can also renovate the property to demand a higher price. Whether you buy an undervalued property and fix it up to sell or you remodel a rental property, you can increase its value more quickly, giving you an even greater return on your investment.
Since the supply of land is limited and the demand for it continues to increase, the lack of space for the construction of new properties also significantly boosts the real estate value of a particular region.
Cash Flow
The inflow of a steady income is one of the key benefits of real estate investments. If you have invested in a rental property and it generates an inflow of cash every month, then you can also accumulate a good amount of wealth over time.
In case you have sufficient funds, you can also invest in multiple rental properties as they are likely to result in more monthly income.
Diversification of Portfolio
Real estate has a low or, in some cases, negative correlation with other major asset classes. This means the addition of real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk.
One option is buying and leasing out rental properties, vacation rentals, or commercial buildings. You can also choose less traditional avenues like buying vacant land and either leasing it for farming or hunting or subdividing and selling it.
You can also invest in the various commercial sectors, including multifamily, retail, industrial, offices, and healthcare, through real estate investment trusts (REITs).
Inflation Hedge
The inflation-hedging capability of real estate stems from the positive relationship between GDP growth and the demand for real estate. As economies expand, the demand for real estate increases.
This, in turn, translates into higher capital values. Therefore, real estate tends to maintain the buying power of capital by passing some of the inflationary pressure on to tenants and also in the form of capital appreciation.
More Control Over Investment
Investing in real estate is a low-risk option as properties are tangible assets with less chance of overnight loss. Moreover, it offers more control over the investment, providing opportunities to generate multiple income streams and tax benefits.
To maximise profits, timing is crucial. Avoid investing at an inopportune moment, as this can result in minimal returns. Patience is also important, as significant property value appreciation usually takes time. Holding onto the investment until the right time to sell is advisable.
Make sure that the time of your buying and selling property is right as the only way to lose money in real estate is by investing at the wrong time, which might leave you with a little-to-no profit margin.
Retirement Savings Plan
When you invest in real estate, it’s not liquid. You invest in it for the long term. As time passes, you earn more home equity. When you are approaching retirement, you can sell the property. If you rent out the property instead, the generated cash flow means you are still investing in your retirement.
Quick Results
Investing in rental properties is a popular method for generating passive income for owners, as it often provides tax-free benefits. From the moment a tenant moves in, the property owner starts receiving monthly rent payments according to the terms of the lease agreement.
This means quicker returns on investment, potentially within days, making it a more attractive investment option compared to others that may require years or months to yield profits.
Additionally, rental properties can appreciate in value over time, providing long-term financial benefits for the owner. By keeping the property well-maintained, the owner can increase the rent (to an appropriate amount), leading to a rise in property value.
Moreover, rental properties can offer a stable and predictable source of income, which is a desirable trait for investors looking to diversify their portfolios. With proper planning and management, rental properties can be a smart and lucrative investment option.
Multiple Options
Investing in real estate can take on many forms. Some individuals prefer to buy and hold onto properties, as it provides a steady monthly income stream and helps save up for future plans.
Flipping can also be an attractive option. This involves locating undervalued properties, renovating them, and selling them within six months, avoiding prolonged carrying costs. By repeating this process multiple times, one can achieve their financial goals.
Financially Safe
Investing in land-based properties is considered a secure financial investment, as its value is not influenced by external factors like many other investments.
The value of the real estate is not impacted by political unrest, conflicts, natural disasters, or other such events. Unlike stocks, the value of real estate is not subject to economic market fluctuations, making it a safe financial option.
Easy Access to Loans
Real estate investing can be a profitable venture, and banks are often willing to support these types of investments by providing loans to qualified individuals. To be considered for a loan, it is important to have a good credit history and stable employment.
Additionally, prior experience in real estate investing or having a knowledgeable sponsor can increase your chances of getting approved for a loan. The interest rate on the loan will depend on current market conditions, and there may be options for choosing the length of the mortgage.
Conclusion
It is important to note that there are a few drawbacks to consider as well. For instance, the lack of liquidity (or the relative difficulty in converting an asset into cash and vice versa) can be a major concern.
Unlike a stock or bond transaction, which can be completed in seconds, a real estate transaction can take months to close. Even with the help of a broker, it can take a few weeks of work just to find the right counterparty. Still, real estate is a distinct asset class that’s simple to understand and can enhance the risk-and-return profile of an investor’s portfolio.
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