You’ve done everything right – graduated from college, landed a high-profile job, met with a financial planner, took out a life insurance policy, set up an automatic savings account, diverted funds into your 401k to take advantage of your employers’ match program, spent weeks researching investment alternatives, diversified your portfolio…
Or maybe you haven’t even started yet…(this is a good time to check out our FREE ebook: The 50 Terms You Need to Know Before Investing in Real Estate)
Either way, you’ve heard of people make thousands (or millions) of dollars through real estate investing. How do these people know where to invest and what are their methods for considering a potential investment? Are you investing in real estate and, if not, how can you quickly learn from the experience (and mistakes) of others to improve results and start investing immediately?
Below are the five common reasons investors choose real estate as the foundation of their investing strategy:
Low VolatilityReal estate offers a unique risk profile that makes it attractive for investors who are concerned about uncontrollable exposure to short-term changes in value. In general, volatility refers to the amount of risk or uncertainty associated with the value of an investment vehicle. Low volatility means that the investment's value changes in value at a steady pace (such as treasury bonds or exchange traded funds). On the contrary, high volatility means that the value, and ultimately the price of an investment, is likely to shoot up or plummet rapidly over a short time (such as cryptocurrency or securitized commodities like oil, corn, steel, etc.). Real estate is a prime example of an investment vehicle where prices do not typically fluctuate dramatically, and therefore believed to be of lower volatility and can ultimately be defined as more secure.
In a nutshell, the lower the volatility, the safer the investment.
Real Assets vs Financial AssetsThey say seeing is believing. Most investors who choose real estate believe there are tremendous benefits to investing in real assets, which are also know as asset-backed securities. An asset-backed security is an investment that is connected to something physical which can be used to secure the value of the investment. With real estate, the property itself is tangible and has a market value unlike financial assets, such as stocks, that rely heavily on investors' sentiments, attitudes, and expectations, leading to high volatility (see number 1). Values of real estate are determined by comparing the subject property to other similar properties recently bought or sold in the surrounding market. As a result, real estate offers investors the ability to clearly quantify market value.
Portfolio Diversification Through Real EstateThe low correlation with other asset classes makes real estate a great investment option to diversify financial portfolios. In finance, correlation refers to the degree in which two different asset classes move in relation to each other. Real estate performance often has little, or no, correlation with other investment classes such as equities or bonds. When building an investment portfolio, savvy investors focus on selecting asset classes with varying degrees of risk and most include some form of an investment in real estate. Add real estate to your portfolio . For existing portfolios, the addition of real estate assets alongside stocks and bonds will allow you to gain similar overall returns with lower risk, or higher returns with the same amount of risk. For more on this read the on real-estate as an asset class by Credit Suisse.
Hedging Your Bets Against InflationReal estate investors know that their properties have built-in mechanisms to protect against inflation. This is important because inflation can have a significant impact on the rate of return for your investments and, when incorrectly factored into an investing strategy, can result in missed expectations. With buy-and-hold residential rental properties, where investors are committing capital for extended periods of time (often 5 or more years), the rental rates are usually indexed to inflation and will increase accordingly. This helps reduce, or event offset, inflationary pressure that can cause money itself to lose value over time. Alternately, if inflation trends are fluctuating with high frequency, real estate investors can choose opportunities such as renovation projects that have shorter time frames.
Don’t Be Afraid Of IlliquidityOften, the argument against real estate investments is that they are typically illiquid – meaning that it can be difficult, or at times impossible, to withdraw your investment before a project is complete. Rather than seeing this as a disadvantage, investors view the illiquid nature of a real estate investment as an “automatic savings account.” Just like any auto-savings account, it is important to consider how much money to contribute to the account based on all your income and expenses. Once investors have a clear handle on how much money can comfortably be invested, the next step is to identify a property or opportunity that is aligned with the amount of money available. This becomes a question of finding an investment at the right price (such as an off-market deal with value-add potential) or pooling funds with other investors to increase buying power and improve overall returns. Most real estate investments offer distributions at regular intervals. These distributions are typically based on net profit and provide immediate income while the project is underway.
This post is not meant to sway anyone from investing in stocks or bonds but to highlight some of the most common reasons why real estate is an investment strategy that can produce incredible benefits when done correctly.
If you feel like brushing up on your real estate related terminology, download our ebook by clicking on the graphic below.
Curious about us? Click below to learn more about REvolve and how we can help you get started with your real estate investing journey.