The market is an unpredictable beast. In a bull market when funds are performing well and optimism is high, investors try to time the market and pour money into stocks hoping to strike big. Yet when the market inevitably dips, people who are solely invested in stocks and bonds face huge losses.
To weather the stock market’s instability, many sophisticated investors—from ultra high net worth individuals to public pensions—seek alternative investments with high returns and low volatility. Unsurprisingly, real estate has emerged as their investment of choice. Due to its unique characteristics, long time horizon, and creative methods for yielding high returns, private equity real estate remains a solid investment with great upside.
Here are some of the most notable advantages of real estate investments.
1. Cash Flow
Disciplined investors know that real estate is an excellent long-term investment, but that doesn’t mean they’re giving up short-term benefits. One of the biggest advantages of real estate investments is they generally provide a regular stream of rental income that’s higher than typical stock dividend yields. This passive cash flow is one of the main reasons investors prefer real estate. Rental income can make up about half of the returns on real estate investments and can help you build equity in your property.
2. Leverage
With a little creativity, real estate provides investors with many unique ways to leverage their money to build wealth. For instance, mortgages let investors purchase real estate with a relatively small initial investment. Rental income generally pays down the mortgage each month and these investment opportunities continue to appreciate with time. Investors can also utilize the equity value of their real estate investment by taking out a home equity loan to get cash or a home equity line of credit (HELOC).
3. Tax Shelter
Real estate investments provide significant tax sheltering, which is essential for high net worth individuals to wisely protect and significantly grow their wealth. Robert T. Kiyosaki said it best: “It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” Rental income is not subject to social security and Medicare taxes, and depreciation and mortgage interest deductions work in an investor’s favor. Lastly, the IRS doesn’t tax real estate appreciation, providing an incentive to hold real estate long term to minimize your tax exposure.
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4. Diversification
Private equity real estate investments aren’t correlated to stock market fluctuations, which makes them an excellent choice for goal-based investors. Real estate investments can remain unaffected despite market volatility. Because they achieve different investing goals than traditional stocks, private equity real estate is a great way for savvy investors to diversify their portfolio.
5. Appreciation
Known for its excellent appreciation, real estate is an investment opportunity that’s well-suited for individuals with a long time horizon. A number of factors—both internal and external—contribute to real estate appreciation. In Cape Town, South Africa, the country’s unique geographical features have resulted in a fixed supply of real estate. As demand naturally increases, real estate prices have soared, providing an incredible investment opportunity.
In terms of internal factors, investors can make smart improvements that tangibly improve the value of their real estate investments. While there may be short-term dips in real estate, disciplined investors who seek a long-term investment will almost always see their investment opportunities appreciate.
6. Security
Unlike stocks which fluctuate and are dependent on numerous factors that are entirely out of your control, real estate investments offer more security and peace of mind. Like gold, oil, and diamonds, real estate is a hard asset with meaningful intrinsic value; both the property and the land on which it sits provide value. Therefore, “By choosing the location and asset quality wisely, investors can benefit from the security of knowing that they own an asset that has the potential to earn income regardless of what happens to the existing tenant(s).”
7. Improvable
As mentioned above, stocks and bonds are tied to a number of factors, many of which are completely out of your control. Real estate investments, on the other hand, are improvable. Selecting responsible tenants, proactive management policies, appealing marketing campaigns, creative financing strategies, cost-effective and strategic improvements to structure and aesthetics—all of these can impact your investment property’s value and make a long-term, positive impact.
8. Tangible
Famous real estate investor and philanthropist Louis Glickman’s simple words help explain why people have been drawn to real estate for all of history. He says, “The best investment on earth is earth.” While purchasing stock in a company does entitle you to a tiny slice of “ownership,” in reality your position is shared by thousands of other investors. With real estate investments, you own a specific, physical building. You can look it up on a map, or point it out to friends and family as you drive past. The tangible nature of real estate gives owners a certain amount of pride that intangible investments just don’t have.
9. Hedge Against Inflation
Private equity real estate investments are a great way to hedge your portfolio against inflation. As governments across the globe print more money to stimulate the economy, inflation rises and the value of many goods and services struggles to keep up.
Real estate, however, is one of the few assets that reacts proportionately to inflation. When inflation rises, home values and rents generally rise with it. While nearly all real estate investments react this way, rental properties are especially effective since rents can be adjusted upward during inflationary periods.
Real Estate: The Smart Choice for Savvy Investors
Providing consistent cash flow, greater security, and broad tax sheltering are just a few reasons why more sophisticated investors are adding private equity real estate investments to their portfolios. As part of a diversified portfolio, these investment opportunities offer long-term value and high returns regardless of how well the rest of the market is performing. With a rapidly growing global population driving demand, real estate investments are only going to become more lucrative with each passing year.
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