7 Reasons to Invest in Real Estate

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 is one of the most common reasons people give for investing in property, but it is only one of several.

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

Periods of high inflation, like 2022 in the euro area, erode the value of cash savings. In 2022, share and bond prices also fell as inflation and interest rates rose. 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 substantial returns in the long run, they tend to be 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. 

Property prices tend to move less from day to day than share prices, partly because properties change hands rarely, which also makes them harder to sell quickly.

4. Diversification

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 a 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 falls, others may rise and offset some of the loss. Real estate investments are not as 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 to your portfolio.

5. Transparency

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

Owning property, or a share of it, can produce rental income and capital growth over the long run, although neither is guaranteed.

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. Some property loans are secured

When a property loan is secured, the lender has a claim on the property: if the borrower cannot pay, the property can be sold and the proceeds used to repay lenders. If other lenders rank ahead of you, or the property sells for less than expected, you may not be repaid in full and can lose part or all of your investment. Each offer's Key Investment Information Sheet (KIIS) explains what you are investing in and whether it gives you any security.

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 Investment Information Sheet. There, in addition to all the benefits, you will find the potential risks to the investment opportunity.

Investing in financial instruments carries risk, and you may lose part or all of your invested capital. Ensure you understand the risks before investing.