You hear it from your friends, family, clients and colleagues; invest in real estate! Is this a sound decision and a profitable sector to place your money? With the proper due diligence and comprehensive analysis, I believe it is an excellent decision! History has proven that real estate has significantly outperformed most other investment markets. However, you must be aware and conscious of both the risks and benefits of owning investment property. When I say "investment" real estate, that is precisely how you should be viewing the asset - as an investment - and will this provide a desirable return on your money?
In the majority of investments (stocks, art, jewelry, bitcoin, etc.), you are hoping to buy something that will appreciate in value, then sell it later for a profit. In some forms of investing (buying a poorly run business, for example), you may be buying something that produces income and hoping to improve that asset's performance in order to increase its value. For most, this involves too much work and is undesirable. What we are left with is the subconscious understanding that to "invest" is to buy something you believe will be worth more later. If this is based on sound principles, it can work. If it's not, its really more like gambling.
Those buying properties solely because prices were climbing and for no other reason have one exit strategy: sell later. They also only have one way to be successful: hope the property continues to appreciate. Any outcome other than these two is virtually guaranteed to lose money. Wise investors don't bet on appreciation. Instead, they purchase properties on a sound judgement that the property will generate more income than it costs to own. For these folks, who "cash flow" positively, they don't care what the market does. If prices drop, they are safe. If prices rise, they have more options.
Like other sizable investments, you must evaluate your decision using a comprehensive analysis encompassing all of the elements beyond cash flow and appreciation, like equity paid by the tenants, interest tax deductions, potential property depreciation, and the fact that it is a tangible asset. This is not an easy task, but with the right skills and knowledge, you can generate this type of analysis facilitating the decision to invest.
So what are the benefits specific to investing in real estate? The biggest advantages are competitive risk-adjusted returns, high tangible asset value, attractive and stable income return, portfolio diversification, and inflation hedging. Average 20-year returns in commercial real estate slightly outperform the S&P 500 Index (20-year return approx. 8.6%), running at around 9.5%. Residential and diversified real estate investments do a bit better, averaging 10.6%. This performance is achieved with low volatility relative to equities and bonds, for highly competitive risk-adjusted returns. The "Flash Crash" of May 2010, when $1 trillion in stock market value was erased in just 15 minutes, illustrates an environment where market volatility is an issue and the dynamics of algorithmic trading are murky. making the more stable pricing of real estate much more attractive. A key feature of real estate investment is the significant proportion of total return accruing from rental income over the long term. Over a 30-year period from 1977 to 2007, close to 80% of total U.S. real estate return was derived from income flows. This helps reduce volatility as investments rely more on income return tend to be less volatile than those that rely more on capital value return. Diversification is one key element you always hear investors talking about, and they're not wrong. Real estate has a low, and sometimes negative, correlation with other major asset classes. This allows for less volatility and higher return per unit of risk.
Real estate is a distinct asset class that is simple to understand and can enhance the risk and return profile of an investor's portfolio. On its own, real estate offers competitive risk-adjusted returns and attractive income streams. Whether it's generating an annuity stream, creating a college fund or preparing for retirement, real estate investments are an excellent choice. If you would like to meet and expand on the information above, I would welcome an opportunity to visit with you!
Shelbee Wallace was born & raised in Colorado and graduated from Colorado State University in 2018 with a BS in Finance with concentrations in Real Estate Finance and Investment Analysis.