Experts suggest that investing in real estate can act as a safeguard against inflation.
Experts suggest that investing in real estate can act as a safeguard against inflation. Here is essential information to consider before entering this realm.
According to professionals, engaging in real estate investments can result in significant additional income annually for some individuals. Moreover, in the current inflationary climate, such investments may prove to be strategically advantageous.
Derek Graham, the principal and founder of Odyssey Properties Group, explains that real estate investments can serve as a hedge against inflation if rental prices keep up with or surpass the inflation rate. Property types like multifamily buildings, which can adjust rents more swiftly, tend to be more resistant to inflation. Graham points out that apartment leases typically span 12 months, allowing rent adjustments to reflect the prevailing market conditions.
In the United States, around 70% of rental properties are owned by individual investors, as reported by the U.S. Department of Housing and Urban Development (HUD). Even if becoming a landlord is not your desired path, there are alternative ways to invest in real estate and generate investment income.
To determine if real estate investment suits your needs and kickstart the process, it is crucial to consider the pros and cons carefully:
Advantages of real estate investment:
Supplementary income: Investing in rental properties, whether it's a single-family home, a shopping center, or an industrial warehouse, can yield a steady cash flow through rental income. The amount of income generated depends on the location and type of real estate asset.
Portfolio diversification: Real estate investments generally have a low correlation with the stock market, enabling investors to mitigate losses during market downturns. Diversifying your asset mix across various types of investments minimizes risk and increases the likelihood of favorable outcomes, especially when other assets may underperform.
Potential tax savings: Real estate investing offers potential tax benefits, such as deductions for mortgage interest and property taxes. Depreciation can also help lower your annual taxable income. Additionally, the 1031 exchange allows investors to defer capital gains taxes by reinvesting the sales proceeds from one property into another "like-kind" property.
Disadvantages of real estate investment:
Higher involvement: Real estate investments typically demand significant upfront capital and involve ongoing operational and maintenance expenses. Owning and managing properties can be time-consuming and require substantial effort, especially when dealing with multiple properties.
Illiquid investment: Real estate is considered an illiquid asset class, as accessing your invested money requires the process of selling the property, which can be time-consuming. However, investing in real estate funds provides a solution to this challenge.
Methods of real estate investment:
There are several avenues to invest in real estate, both directly and indirectly, with varying levels of time and capital requirements. The investment amount depends on factors such as the property, location, market conditions, and investment approach.
Common methods include:
Direct purchase: This involves buying either the entire property or a stake in a specific real estate asset, such as apartments, homes, housing complexes, shopping centers, or commercial office buildings.
REITs: Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-producing real estate. Investing in REITs allows you to buy shares in a taxable brokerage account or tax-advantaged retirement accounts like IRAs or 401(k)s.
Real estate sponsor: A sponsor, typically an experienced individual or company, manages and acquires properties on behalf of investors. By partnering with a real estate sponsor, investors can benefit from owning real estate without the obligations of property operations.
Investing apps: Various brokerages and investing apps offer fractional investment options, enabling you to purchase small shares of individual properties or real estate funds at a relatively low cost. This approach provides an easy entry point into real estate investing, although the revenue generated may be lower than owning 100% of a property.
In conclusion, real estate investment can be a profitable venture, regardless of the investment amount. Whether you opt to own and rent out properties or invest in real estate funds, diversifying your portfolio with real estate assets can help you navigate market fluctuations and increase your wealth in the long run. Nevertheless, it's essential to consider the investment's liquidity and align your choice with your investment horizon and personal goals.
This article originally appeared on Fortune.