7 Reasons to Invest in Real Estate
Everybody has limited capital, so why would someone choose to invest in real estate over all these other asset classes?
There is a plethora of available investment opportunities out there, from the more typical ones like stocks and commodities, to the more unconventional ones like NFTs and whiskeys. But everybody has limited capital, so why would someone choose to invest in real estate over all these other asset classes?
Passive income. Two words thrown around so much recently. You should be familiar by now with the benefits of passive income; for one, you are practically making money while you sleep (the dream, right?). However, passive income is only one of the many reasons why it’s a good idea to invest in real estate.
1. Passive Income
In essence, passive income is money earned without putting in too much effort. Examples of passive income include cash earned from rental properties, interest, dividends, and royalties. In the context of real estate, investing either in equity or debt can yield passive income. Investing in equity can give you access to regular cash flows from renting out the properties. Investing in debt can give you access to regular cash flows from interest payments. In any case, if you have the money to spare, there is certainly a case to be made in making it work for you and generating income that can be reinvested or used to pay out bills instead of having it in a savings account being eroded by inflation.
2. Protection against inflation
Following the pandemic with the massive support packages from governments all over the world, inflation has risen rapidly to levels not seen in the last decade. Public markets have also taken a big hit from this, as asset prices are more heavily discounted because of inflation. Higher than expected inflation can have a major impact on your wealth if you don’t manage it efficiently. Real estate has historically been good at protecting against inflation as it closely follows the increases in money supply, inflation rate and wage growth over long periods of time.
3. Low volatility
While investing in publicly traded assets like stocks can have huge returns in the long run, they tend to be very volatile as their prices fluctuate daily. These fluctuations can be quite significant and are most of the time unpredictable. If your portfolio is heavily weighted towards these assets, then the impact of these fluctuations can cause your wealth to drop by a considerable amount from year to year, month to month, or even day to day. Real estate as an asset class tends to be much more stable and less volatile. One of the main reasons for that is the fact that completing a real estate transaction takes much more time and resources than buying a share for example, therefore with lower volume you wouldn’t expect huge price changes in a short amount of time.
You are probably aware of the benefits of diversification by now and why it is important. To be precise, diversification allows you to do either of the following two things: achieve a higher expected return with the same risk, or achieve lower risk with the same expected return. Diversification arises when securities in your portfolio are not perfectly correlated to each other. If one of your investments goes down, other investments in your portfolio will go up, compensating for your losses or even resulting in an increase of your wealth. Real estate investments are not generally perfectly correlated with the returns of other asset classes such as stocks or cryptocurrencies, therefore there are certainly potential diversification benefits with adding real estate investments in your portfolio.
Real estate projects are generally more transparent than other financial assets. It is far easier to value a real estate project than a company, as it is more straightforward to project the costs and returns of the property. The fact that costs and returns are more easily determined leaves less room for project owners to misrepresent or exaggerate the potential revenues of the property when compared to a private company, where founders usually over-promise on the prospects of their company. Evaluating a real estate property is also easier for the investor than evaluating a private equity investment, as there are fewer moving parts that need to be considered in order to determine whether this would be a worthwhile investment for them.
6. Build wealth
Investing in real estate is an excellent way to build long term wealth. By owning a property or a piece of it, you are entitled to regular cash flows in the form of rental payments, helping you build wealth over the long run. In addition, if you hold the property for a considerable amount of time and then sell it, you can potentially profit from the property’s price appreciation. The key to that is finding the right properties to invest in which you believe will increase in value with the passage of time.
7. Relatively safe
Investing in real estate in the form of debt can potentially be much safer than lending money to a company. In the case of secured debt, your investment is backed by the value of the property, so in the worst-case scenario where the project owner cannot pay your interest, the property will be liquidated, and you will be paid back from the proceeds of the sale. If there are other lenders higher in seniority than you, then you might not be paid in full, but you will still receive a large percentage of your initial investment back.
It’s not all sunshine and rainbows
As always, before you make any investment, it’s strongly recommended to read all the information on the campaign’s page, including the Key Investor Information Document. There, in addition to all the benefits, you will find the potential risks to the investment opportunity. We would also like to point out that in the case of a debt investment, your money is locked for the duration of the security (usually 2-5 years), so make sure you won’t need the money you invest for that timeframe.
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