Real estate has long been touted as one of the “must have” options in any portfolio, and there are some very compelling reasons to buy property yourself. For instance, investing in real estate can actually give you a high yield while simultaneously protecting your capital. That’s the reverse of what happens with most high-yield investments. Generally, the higher the yield, the higher the risk to your capital. For example, you might find an investment option that provides the chance for up to 60% returns in the early stages, but there’s also the risk of 90 or 100% loss of your capital, which negates any earnings potential. So, how does real estate both offer high yields and protect your capital?
One of the reasons this is true can be found in the name of the asset – real estate. It’s physical. It’s tangible. It’s brick and mortar. Even if you’re investing in a real estate fund rather than buying directly, you’re still putting your money into something with physicality that doesn’t hinge on the performance of managers, the decisions of CEOs, the actions of creditors, and the like. With stocks, that’s not the case at all. What was a high yield investment one day might become worthless the next with a single poor decision or a scandal involving the actions of a high-profile decision maker within the company. Or, it could go from boom to bust simply because a competitor came along who did the same thing, but better. In these instances, you’re stuck owning stock that’s not worth anything, and your capital is gone. You can’t sell the stock for what you paid for it, much less for a profit.
Your Portfolio Is Diversified
One reason that so many investment advisers recommend that their clients add real estate to their portfolios is due to the asset’s low correlation with other assets. In fact, in some cases, it has a negative correlation. What that means for investors is that real estate investments tend to lower the volatility across your entire portfolio. There’s also a correlating higher return per risk unit. You can take this analogy even further, though. For instance, by investing through a real estate fund, you can diversify the types of properties in which you invest. You can add residential properties, commercial properties, retail properties, industrial properties, and more, so that you have multiple hedges against low performance and ensure that your capital is protected. In addition, because you’re investing through a fund rather than buying property directly, you’re able to get around the traditional barrier to entry here – the initial cost of a down payment, which can be very high.
Protection from Inflation
Inflation is present in most of the Western world today as governments continue to print money hand over fist to encourage the economy to keep moving. It makes sense, at least on the surface, but it creates many issues. One major problem is that the more inflation increases, the less your money is worth, and that applies to your investments. However, real estate is largely impervious to inflation. In fact, the value of real estate tends to rise right along with the inflation rate, so that it keeps pace. This means that your investment will not only continue to hold the value of your capital, but it will continue to appreciate and provide a higher return even when other investment options are performing poorly.
Earn an Income Return
When most people think about a return on their investment, they think about capital value return. That’s all well and good, but it doesn’t solve your cash flow issue in the meantime. This is where investing in real estate can really shine. It offers income flow on a monthly basis that can offset or even completely cover your own costs of living. With direct purchase real estate, once the property is paid off, all the rent will technically be profit. However, there’s more to be gained by working with a real estate fund in this way, because you don’t have to worry about paying off a mortgage before you can see profit from your investment.
High Yields without the Risk
Playing the stock market can be a great thing. Some people are able to make savvy decisions. Others are lucky, and their bets pay off. However, this is definitely a gamble, make no mistake. Consider the fact that in 2010, over $1 trillion in stock value was completely erased within a mere 15 minutes. That doesn’t happen with real estate investing. Instead, you’re able to enjoy steady appreciation and protection of your capital, in conjunction with higher yields than you’re likely to see from stocks, and definitely more than what you’d see with bonds or CDs.
Real estate investing is not a guaranteed thing, though. This is particularly true if you’re contemplating buying property directly. There’s an immense amount of work that must be done before you even buy a property, much less what’s needed to get it ready to put on the market. Once on the market, you have advertising costs, the frustration of vetting renters, the ongoing costs of maintenance and mortgage payments, and a great many other things that can reduce your returns. None of these happen when you invest with a real estate fund, though. By investing with a fund, you can protect your capital, ensure that you have monthly cash flow, and avoid the cost and pitfalls of owning property outright.
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