7 Reasons Why You Should Invest In Real Estate in 2019
Updated: May 25, 2020
There are many reasons why anyone should look toward real estate investment over traditional investment options like stocks and bonds. Here’s our list of 7 reasons why real estate investment is (and probably always will be) one of the best investment opportunities available:
We have made many posts about portfolio diversification in the past, but this is the most important thing to take into consideration when looking for investment opportunities. Real estate as an asset class should make up a portion of your portfolio, in the event of a stock market crash, inflation, or other world events, real estate is usually a safe haven for investors during these times.
Investors who fail to diversify amongst asset classes are far too exposed to stock market risk. Diversifying into safer fixed income assets or real estate will help reduce risk and maximize returns.
Many people overlook the investment potential of real estate as an asset class due to their lack of experience, understanding, or fear of the unknown. Investing in real estate doesn’t necessarily mean directly buying properties, becoming a landlord or even any hands on real estate related activities. Although that is a viable option for entering this market, there are more effective approaches to diversifying your portfolio with real estate which are listed below.
Real estate by default provides significant protection from inflation. When inflation is at 8%, your property is worth 8% more at the end of the year. You can structure property leases to index at the rate of inflation so you can increase your cash flow at the same rate. Comparing these benefits to bonds when they pay less than the rate of inflation.
Real estate has a relatively low correlation with the stock market. Using real estate as an asset to diversify a portfolio is an excellent and practical investment, largely due to the fact that many people are already invested in the real estate market in some form or another through their homes or otherwise.
Low Risk In Comparison
While the value of investment properties may decline over a long period of time, stock prices can plummet over night for a variety of reasons leaving you with potentially massive losses. It’s relatively easy to spot declining real estate markets and pull out before prices hit rock bottom, chances are, using this strategy you will still end up selling the property for more than you paid for it.
With bonds being tied to inflation and stocks being so volatile, the real estate market moves at a much slower pace, identifying risks even before they emerge is something only available to real estate investors and a key reason why the real estate investment market has stayed so competitive, even up against big tech stocks, like Facebook, Google and Amazon.
There are numerous tax advantages to investing in real estate, You can deduct mortgage interest as a rental expense on your taxes. You can write off legitimate expenses for maintaining your investment property, and depreciation could significantly reduce the rental income you have to pay taxes on. You can deduce management costs, cleaning, pest control and insurance costs. You will pay capital gains tax on the increased value of the property when you sell it.
Opportunity Zones provide an excellent way to avoid capital gains taxes for longer term real estate investors, read our post to learn more about the pros and cons of Opportunity zones investing.
Higher Potential Returns (ROI)
There are many ways to maximise returns with real estate investment, some of the crowded spaces, like house flipping, or rental properties can offer excellent returns but are usually highly competitive markets. Land will always be an excellent investment option since it has a limited supply, its value in the long term can only increase. Developing land for use is an emerging sector in the industry and where Ettro Capital primarily invests.
Real estate funds and trusts can offer preferred returns to investors. On top of profit split, fixed preferred return rates can make investing into a real estate fund extremely appealing.
What makes real estate investment so unique is the plethora of ways you can get started. To a new investor this may all seem a little daunting but once you realize the potential returns and relatively low risk of investing into real estate, it becomes a staple of all properly diversified investment portfolios. Here are just a few ways you can invest in real estate:
You can purchase an investment property to rent out and generate cash flow and equity as the home value increases
You can purchase a piece of land for long term gains or to develop and sell for profit
You can participate in a real estate fund which manages all of the pooled investment and pays returns, usually quarterly or annually
You can purchase a run down or foreclosed home in need of repair to “flip” for profit
You can even buy, sell and rent homes all from your home or office computer using some of the new technology that's evolving in this space through websites like roofstock, or opendoor.
Much higher Upside Potential
A piece of real estate can have significant upside potential. Commercial properties, for example, can be renovated and underutilized sections developed to generate far more cash flow than it was in the beginning. Management changes like evicting those that don’t pay rent, improving the security of the building and little “best in class” features that don’t cost much but attract a higher class of tenant are ways to earn far more from a property than the prior owners.
This is true whether you’re talking about commercial or residential real estate. For example, you could renovate both a mother-in-law suite and main residence to create two rentable units. Or renovate the break area on the first floor of a commercial building, renting it out to a third party to sell concessions. Another option would be renting space in high traffic areas out to vending machine route owners.