3 Reasons to Add Real Estate to your Investment Portfolio
Except you are Nostradamus, it’s impossible to say with certainty which asset class is going to pay the best returns year-in-year-out.
The key to investing success is to spread your investments over a range of assets. Over long periods of time, a portfolio of mixed investments will typically out-earn an investment in any single asset type.
The most common tactic investors use to create a balanced investment portfolio is to spread their money across three classes of assets; stocks, bonds and real estate.
Here are 3 reasons to consider adding real estate to your portfolio:
1. Portfolio diversification
Real estate can be the most challenging investment and for that reason, it’s sometimes overlooked by investors, even though it’s a useful portfolio diversification tool. Real estate offers a slow, predictable rate of return over the long run and can be a great way to build long-term wealth.
2. Hedge against inflation
Direct investment in real estate makes a great hedge against inflation which can deliver steady income once the mortgage is paid off. This is very much applicable to investors who have money, expertise and time to deal with property maintenance and tenant selections as well as have sufficient capital to cover acquisition costs.
3. Cash flow, appreciation and leverage
If you’re aiming for both short- and long-term gains in your investment portfolio, then real estate should be thrown in. You can rent out your property for positive yearly cash flow which you can do until you finally sell the property. Of course, when you’re ready to sell, your property will likely have appreciated.
Owning real estate also gives you impressive leveraging power which is something you don’t always get with other types of investments. Your property has a real value which gives you the ability to borrow against it to obtain capital for other investments.
You can use your property as collateral even if you don’t own it outrightly. Funds generated from this can then be used to upgrade the existing property to add value. Alternatively, you can use the funds to purchase more property and expand your portfolio. Leveraging your investment in this way allows you to build wealth at a much faster pace.
Although perfect investments don’t exist, portfolio balancing can improve the imperfect investments you do hold. By investing across the three asset classes over long periods of time, you increase the likelihood you’ll achieve your long-range investment goals.
While having other asset classes in your portfolio is definitely a smart move, real estate has proven again and again that it is king among investments and you should absolutely include it in your investment portfolio.