What Makes Real Estate So Valuable For Investment Portfolios?

Tuesday, 28 May 2024, 8:16 am
Press Release: Hugh Grant

You're probably familiar with the important piece of advice to “diversify your portfolio.” Essentially, that means holding many different assets within your investment portfolio, so you can mitigate the risks associated with those individual assets and ultimately achieve more consistent, stronger growth.

It's not the sexiest approach to investing, but it is the most reliable. And if you want to make the most of this strategy, you'll need to make sure real estate is a cornerstone of your portfolio.

What is it that makes real estate such a critical inclusion in the average person’s investing portfolio?

The Many Types of Real Estate Investing

First, we need to acknowledge the diversity and versatility of real estate investing. While we can discuss real estate investing as a broad umbrella, the reality is there are many different individual strategies and approaches that can all be considered real estate investing.

For example, a person can buy rundown houses to fix and flip; this is an exceptionally risky strategy, but one that offers potentially lucrative payoffs if done correctly.

More commonly, people pursue rental property management in the residential space. Thanks to property management companies, it's easier than ever to buy attractive properties, handle maintenance and repairs passively, and collect monthly revenue in the form of rent payments.

If that doesn't work for you, investing in commercial properties could be an option. Commercial properties demand more capital investment and are more expensive to manage, but they also have higher profitability potential and more consistent tenants.

And if you hate the idea of practicing due diligence on individual properties, you can still get exposure to the real estate market by investing in real estate investment trusts (REITs). Shares of REITs are traded like stocks, making them easily accessible even to novice investors. They may not offer the high return that rental properties do, but they offer ample exposure to the real estate market in general.

Because there are so many different types of real estate to buy and manage, and because there are so many different styles and approaches to real estate investing, there's something for every investor. It's such a useful, bountiful asset class that it can fit into almost any investor’s goals and vision.

Real Estate vs. Other Investments

We can also examine the value of real estate as it compares to the value of other asset classes. Diversification is important because every asset comes with strengths and weaknesses, so don't make the mistake of assuming that real estate is the “best” overall asset class. That said, it does offer a number of advantages over some of its counterparts.

Historically speaking, real estate investments return more than stock investments. In some ways, they're also less risky; the only caveat here is that real estate investments require more careful due diligence and management, and without the help of a property manager, they aren't truly passive. Many people also appreciate the fact that real estate investments are “real,” tangible properties – and they can be used for far more than just rentals.

Compared to bonds, real estate is similarly impressive. Bonds are much safer than real estate investments, but they also offer a much lower return.

And if we compare real estate to alternative investments like precious metals, commodities, and cryptocurrency, real estate is generally more stable and more reliable in terms of historical performance. Of course, we say this generally and broadly, as certain investments in other categories will far outperform certain types of real estate investments.

Keys to Success

If you want to be successful in including real estate in your investment portfolio:

· Find the right balance. The right balance is going to look different for every investor. Some investors benefit by having most of their net worth tied up in real estate, while others more strongly benefit from splashing in real estate as a secondary consideration.

· Be selective with individual property acquisition. If you choose to buy individual properties, be extremely selective. Not all properties offer the same potential returns, and some of them can actually lose money. There’s no substitute for due diligence here.

· Learn from the best. Knowledge and experience are crucial for real estate investing success, so consider shadowing a mentor. The more you learn from more experienced investors, the better.

· Get support. Managing properties can be a headache, so consider working with a property manager to make your properties more passive.

Real estate isn't a perfect asset, nor can you afford to invest in real estate blindly. Investing in real estate is a complex endeavor that requires discipline, research, and careful consideration. That said, an appropriate mix of real estate in your investment portfolio can greatly strengthen and enhance it, so don't make the mistake of neglecting this powerful asset class.

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