What Makes Real Estate Such a “Good” Investment?

If you know anything about real estate investing, you probably know that it’s seen as a powerful strategy – and that it’s been used by countless savvy investors to accumulate wealth and achieve their financial goals. But why, exactly, is real estate considered such a “good” investment? And how does it stack up to other investment options?

Real Property

Many people appreciate that real estate is, in fact, “real.” Compare real estate to shares of stock, which are typically bought and sold in the digital world exclusively; these shares are merely hypothetical constructs, representing a fractional share of ownership in a business entity that is also a hypothetical construct. When you buy a house, you own that house. There are some pros and cons associated with this dynamic, but many investors feel the pros outweigh the cons. For example, properties do require more upkeep and maintenance, but they also offer something practical that you can use in your own life.

Versatile Strategic Aims

Real estate is also valued because of its versatile potential strategic aims. There are many different types of properties to purchase, and they can be used to achieve many different strategic aims, meaning they can fit into almost any investment strategy.

For example:

• Rentals, land development, and more. Purchasing a primary residence for your own family is a kind of real estate investment. So is purchasing a rental property that you’ve fixed up as a source of passive income. So is purchasing land with the explicit goal of using that land for some future development.
• Active or passive management. Many investors like to manage their own real estate because it gives them a more direct sense of control. They can personalize the property and customize their strategy in perfect accordance with their long-term goals. With a real estate management company, however, everything gets easier. You’ll sacrifice a bit of autonomy, but you’ll be able to turn your properties into fully passive, revenue-generating machines.
• Residential or commercial. Residential and commercial real estate are very different animals. Commercial properties are more expensive and more complicated, but potentially more profitable, while residential properties are more accessible, but perhaps riskier.
• Single family or multifamily. Single family and multifamily rental properties offer similar gives and takes. Multifamily properties are more expensive and more of a hassle to manage, but they have built-in risk compensation and greater revenue streams.
• REITs. If you don’t like the idea of buying properties directly, you can always invest in real estate investment trusts (REITs) as well. These investment assets allow you to invest in property indirectly, allowing a group of managers to make the major decisions for you.

Local Dynamics

Another benefit of real estate is that it allows people to invest in different areas. Some cities are cheaper than others. Some cities are more popular than others. Some cities have incredible promise for growth, and others have historical legacies. Whatever you’re looking for, you can find an area with properties that appeal to you.

Historical Performance

Historically, real estate investments have performed extraordinarily well in the United States. In past decades, this has been one of the best asset classes for investors to consider, and we have reason to believe this trend will continue well into the future.

Financial Leverage

Financial leverage is a distinct advantage that allows investors to invest with money they don’t currently have. Essentially, it means investing with borrowed money. It’s possible to use financial leverage in many areas of investing, but it’s easiest and most accessible in the real estate world, since most people use mortgages to buy their homes. It’s important to exercise caution when utilizing financial leverage for your own gain, as overleveraging is a considerable risk – but it’s a great advantage for those who can use it responsibly.

Tax Breaks and Deductions

Another perk of real estate investing is that it gives you access to more tax breaks and deductions. This can minimize your expenses, increase your gains, and help you avoid paying unnecessary taxes to the government.

Portfolio Diversification

One of the first things you’ll learn as a new investor is the importance of portfolio diversification. The general idea of portfolio diversification is to hold many different types of assets, and use many different strategies simultaneously, to minimize risk and increase the consistency of your returns. If you have all your eggs in one basket, so to speak, even a single catastrophe could cause your portfolio to implode. Conversely, if your assets are distributed across many different classes and categories, no disaster can wipe out all of your wealth.

Real estate investments serve a crucial role of complementing other traditional investments. While the real estate market and the stock market can sometimes be influenced by the same broader economic factors, they do perform somewhat independently under most circumstances. Holding a diversified portfolio of stocks, bonds, real estate, and other assets is one of the best ways to minimize risk and increase your total returns, especially over a long enough time horizon.

The Value of Real Estate in Your Portfolio

Real estate can’t possibly be the “best” investment, because there’s no such thing as a “best” investment. Each type of investment offers key strengths and weaknesses that must be considered in the balance of your overall portfolio. Still, real estate offers tremendous advantages, including strategic versatility, strong historical performance, and many tax breaks and deductions, so it’s well worth considering as part of your overall financial strategy.