Why Real Estate Investing

First, what is real estate?

Real estate is property, including the land or buildings on it. Real estate is a tangible asset and, as such, it can be bought, sold, leased, or rented. When someone purchases real estate, they are buying the land and any buildings or other structures on it. The term "real estate" can also refer to the business of buying, selling, or renting land or property. 

Passive Income

Many people are attracted to real estate investing because it offers the potential for higher returns with relatively little effort. This is also known as passive income. Passive income is defined as earnings derived from a rental property, limited partnership or other enterprise in which a person is not actively involved. A few examples of passive income streams are: rent from investment properties, dividends from REITs, owning a self-storage facility, or hard money lending.

Owning real estate can be a way to increase your income in a consistent way. If you own commercial or residential real estate, you can rent to tenants to gain monthly income. However, a word to the wise if this is something you are considering: be sure to do your research and speak with a qualified professional to get an idea of what you're getting into.

Appreciation

First, what is appreciation? Real estate appreciation is when the value of a home or property increases over time. 

If you own real estate, it will likely increase in value naturally with the market, but you can also force appreciation. You can do this by making strategic improvements to the property to increase its value. For example, you could renovate the kitchen or bathrooms, install energy-efficient appliances or solar panels, or add a pool or deck. By adding value to the property, you will usually increase its resale value and rental income potential. It’s important to note that appreciation is not guaranteed and will come down to choosing the right property to invest in.

Diversification

Real estate is known to have less correlation with public markets, which means that when stocks are down, you’ll probably notice real estate is up.1 This diversification can help protect your portfolio from market volatility.

Real estate is also a physical asset. This tangibility gives investors added peace of mind knowing that their investment is something they can see and touch, unlike stocks and mutual funds, which can fluctuate greatly in value.

Real Estate as an Inflation Hedge

What is an inflation hedge? An inflation hedge is an investment that retains its purchasing power during periods of inflation. While most investments lose value when inflation rises, there are a few investments, like real estate and gold, that tend to hold their value or increase in value during these periods.

Real estate can be used as an inflation hedge in a few ways. 

First, the impact of inflation on debt. When home and property prices rise, it decreases the loan-to-value of any mortgage debt, which creates a discount. Because of this, the equity on property increases, but your mortgage payments stay at a fixed-rate.

Inflation can also benefit real estate investors that earn income from rental properties. This is because if the price of the home is higher, and usually so is the rent. If you’re able to boost the cost of rent while keeping the mortgage the same, this can be an opportunity for an increase in income.

Last, real estate investing can be an inflation hedge tool due to property values increasing over time that usually stay on an steady upward trend. As inflation increases, the value of your property will likely increase as well. This means that your investment will not only hold its value, but it could also increase in value, giving you a nice return on your investment.

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Before making any investment decision, it's important to do your research and understand the risks involved. But for many people, investing in real estate can be a smart way to build wealth over time.

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1 “How to Diversify Your Portfolio Beyond Stocks.” Investopedia, 15 Apr. 2022, www.investopedia.com/investing/diversify-your-portfolio-beyond-stocks.

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