The attractiveness of investing in real estate lies in its potential for both stable income and potentially large returns. When combined with other investment options as a diversified portfolio, real estate can assist in mitigating risk and creating steady income streams. This post discusses ways in which investing in real estate can provide a diversification benefit to an investor’s portfolio, while also promoting long term growth.
1. A Tangible Asset With Intrinsic Value
Unlike many other investment options like stocks and bonds, real estate is a tangible asset with intrinsic value. It is a tangible commodity that represents physical assets and can give an investor peace of mind when they have invested in a diversified portfolio.
Tangible asset advantages of real estate:
• Stability – Stocks are typically much more volatile than real estate, so real estate can be used as a means to stabilize your investment portfolio and limit the impact of volatility associated with other investments.
• Appreciation potential – As time passes, real estate typically appreciates in value. An investor could use this increased value to create a larger net worth.
• Hedge against inflation – The value of real estate and the income produced by renting real estate will typically increase as inflation rises. This can aid in maintaining the purchasing power of money.
A tangible investment will provide a solid foundation for a diversified investment portfolio.
2. Steady Cash Flow From Rental Income
Another great feature of investing in real estate is the opportunity to earn a steady, predictable income stream from rent. This consistent income flow can provide financial stability and enable you to rely less on the potential for returns from riskier investments.
Rental income advantages:
• Predictable returns – Rental properties can produce consistent monthly income, providing a predictable income stream.
• Diversification of income – Renting out a property produces an alternative to dividend or interest income from stocks and/or bonds.
• Tax benefits – Many tax laws permit the deduction of items related to rental property, such as maintenance costs, property management fees and interest paid on a mortgage from your taxable income.
Rentals provide a consistent income source and help to stabilize your investment portfolio.
3. Opportunity For Capital Gains
Investors in real estate can earn capital gains from the sale of a property. A capital gain occurs when an investor sells a property for a profit after purchasing it.
Capital gains advantages:
• Appreciation – As more people seek to buy homes and apartments, prices tend to rise.
• Forced equity creation – Investors can directly add value to a property either through renovation/repair work or through cosmetic upgrades and/or additions, thereby adding value to the property.
• Tax implications – Depending on the type of investment and the length of time it was held, the taxes associated with selling a real estate investment may be lower than the taxes associated with the sale of other types of investments.
Capital gains can be a very important factor in the ability of an investor to build long-term wealth.
4. Using REITs To Diversify Your Portfolio
For those who want to experience the advantages of investing in real estate but do not want to deal with the direct responsibility of managing physical properties, there is another option called Real Estate Investment Trusts (REITs). REITs are similar to mutual funds in that they permit individuals to invest in a variety of different properties through one investment vehicle.
REITs advantages:
• Liquidity – REITs are publicly traded and therefore are more liquid than direct property investments.
• Diversification – REITs permit investors to own a portion of a number of different properties such as office buildings, apartments, shopping centers, etc.
• No need to manage – REITs are professionally managed, so investors can benefit from the advantages of owning real estate without having to assume the responsibilities of managing that property.
REITs represent a method to diversify into real estate using an investment vehicle that is easy to obtain and trade.
Conclusion
Real estate can greatly improve a diversified investment portfolio by providing a stable asset base, a consistent income, potential for capital appreciation, and a hedge against inflation. Regardless of whether the real estate is purchased through a REIT or purchased directly, real estate provides a tangible asset that generates income and reduces risk in an investment portfolio. Therefore, real estate should be an integral component of a well-diversified portfolio.
