Real estate is arguably the average person’s most valuable possession, whether that be the home they live in or the office block where they run their business. In addition to the personal value it provides, real estate also offers investors an attractive opportunity to build wealth by putting their money in an asset class that’s exciting for so many reasons. Here are just a few of the possible benefits of this route.
Historically, real estate valuations tend to increase over time. For example, if you look at the US housing market, the average property price at the start of the millennium was $165,300 and by the end of 2022 it was $467,700. This upward trajectory can be for a number of reasons, such as increased buyer demand and inflation (if building materials become more expensive, so will real estate). If you sell real estate for much more than you bought it, that’s a good return on your investment.
However, it’s important to remember that price appreciation is not guaranteed. People thought the housing market would keep rising forever in the leadup to the Great Recession (2007-2009). Of course, that proved not to be the case when the US housing bubble burst and prices fell by roughly 20%. The housing market did recover and post-recession measures mean the market is not as vulnerable as it was back then, but you still shouldn’t assume growth is inevitable.
Real estate is a useful way to add diversification to your portfolio as it doesn’t typically correlate with other markets such as the US stock market. In fact, sometimes it can even have a negative correlation with other asset classes, which means your real estate may go up when other parts of your portfolio go down. Real estate is also traditionally less volatile than other investments, so holding some may help reduce the risk in your portfolio overall.
Many investors are drawn to real estate because of the tax incentives on offer. For example, you may be able to deduct expenses related to your property from your tax bill, and have your profits taxed as capital gains rather than income, which usually means a lower rate. You might also be able to defer your capital gains. However, the tax incentives obviously depend on the country you’re considering investing in. It’s wise to consult a local financial advisor to make sure you understand your tax implications.
Potential source of passive income
Real estate offers steady cash flow when you rent the property out to tenants, either residentially or commercially. That cash flow should be positive when everything is going according to plan but could become negative if something changes, like your mortgage payments increase.
However, once you’ve paid off your mortgage on the property, you have the opportunity to earn passive income (money coming in without you needing to work for it). There may be times you need to take on a more active role (e.g. fix a problem the tenant has) and times when your income drops (e.g. a tenant leaves and your property is temporarily empty). But even so, investing in real estate can be a great income stream (and hopefully you’ll have the capital appreciation from price growth too).
In addition to all the financial benefits, investing in real estate can also transform your lifestyle. For example, buying a property in another country means you’ll have somewhere to stay when you want to travel, and a real estate investment could even grant you citizenship to another country if it’s in a country with a citizenship-by-investment programme (Dominica’s is the highest-rated programme in the world).
Finally, a real estate investment could have a huge impact on your sense of self and career prospects. If you think you have an entrepreneurial streak or would relish the chance to be your own boss, your first real estate investment could eventually become one of many in your portfolio, enabling you to create a real estate business of your own.