Investing in real estate is an excellent way to diversify your portfolio with a physical asset that generates income while simultaneously acting as a hedge against inflation. Due to consistent demand, real estate values also increase over time, increasing the potential for profit even more.
Industry experts list these top 5 benefits of having investment real estate in a portfolio:
#1 Passive Income and Increasing Values
The value of real estate keeps increasing for two reasons:
- Rental rates, particularly in the multifamily housing sector, are continuing to rise due to demand.
- As more investors look for quality real estate opportunities, increased bidding activity results in cap rate compression and increased values.
Income-producing real estate also generates passive cash flow month after month. Passive income can be used to pay off mortgage debt sooner, build equity faster, and leverage that equity to purchase more property.
#2 Tax Laws Are Real Estate Friendly
Current tax law is extremely friendly to real estate investors. Non-cash expenses such as depreciation allow investors to reduce the amount of taxable net income. When the time is right to sell, Section 1031 exchanges can be used to defer the payment of capital gains tax by relinquishing one investment property and acquiring another like-kind property.
#3 Hedge Against Inflation
Real estate investors are protected against the short-term and long-term effects of inflation. As prices increase, rents rise, and asset values grow.
According to the Census Bureau the average rate of inflation in the U.S. is about 3.2%, and at the average rate of inflation prices double every 20 years. But commercial real estate has more than outpaced the rate of inflation. In fact, over the past 10 years, average prices for office property, shopping centers, and large apartment buildings have more than doubled, according to the Federal Reserve Bank.
#4 Using Leverage Magnifies Returns
Positive leverage can be used to magnify the returns from investment real estate. Depending on the type of project, you can borrow between 50% and 90% of the property purchase price at interest rates that are lower than the anticipated annual return on the investment. Traditional portfolio components like stocks and bonds aren’t nearly as easy to use as collateral for financing.
#5 Variety of Investment Opportunities
Real estate provides a wide variety of opportunities to investors. Popular income-producing options include single-family rental housing, multifamily property, commercial buildings like offices and shopping centers, and vacant land.
It’s also possible to realize the benefits of investing in real estate without actually buying a property:
- REITs: real estate investment trusts, real estate mutual funds, and real estate ETFs – or exchange traded funds – allow investors to buy shares of publicly-traded real estate funds.
- Crowdfunding: online real estate investment platforms let investors buy fractional shares of institutional-quality office buildings, retail property, and multifamily projects.
- Real estate partnerships: joint ventures with an experienced managing partner responsible for the hands-on, day-to-day operations of the investment works with passive investment partners who contribute money instead of their time while sharing in the profits and appreciation in value that the property generates.