Why invest in real estate?

Firstly, what is real estate?

Real Estate is the investment on property such as land, houses, offices, logistical parks and and other infrastructures. It is regarded as one of the safest assets to own that still offer great revenue, in the form of rent and capital gains. It is also known for its advantage to leverage, which we will analyse further.

The four recognizable real estate investing advantages are it’s cash flow derivated from rents, it’s security has a physical asset, it’s leverage meaning that most of properties are bought with debt, and tax advantages as there are many incentives to real estate investing such as cuts or exemptions.

Overall, real estate is a business on itself, as it has it’s own “employees”, clients, suppliers and administrative processes. Despite that, the investment on real estate can be made through different forms, such as acquiring directly property, acquiring participations on an real estate private investment fund, through ETFs (Exchange-Traded Funds), real estate stocks or REITS (Real Estate Investment Trust).

So, what’s the perfomance?

Overall, the real estate market has returned positive annualized gains, even with the usual “bubble bursts”. Below is the US Housing Price Index, with a 200 plus times growth since 1900, showing the upward tendency but also the consequence of the 2008 real estate market crash, where the record value was only achieved again in 2016. Real estate varies from continent to continent, from country to country and from region to region, and it must be analysed within the same premisses as a region with a good yield can be right next to one with a very bad yield.

As explained earlier, real estate has two main sources of revenue: rent collected from tenants who use the property, but also through capital gains from the sale of that property. Usually, real estate is bought using loans from banks or private investors, creating leverage: from 1 Million dollars and 20% required entry, you can buy five 1 Million dollars properties instead of just one (20% entry of a 1 Million dollars, equal to 200k, times five properties equals to the starting one million dollars). Also, there are tax benefits to real estate as the capital gains tax can be difered to the future and only be applicable when the money received from a final sale will not be applied again on real estate.

In conclusion

Real estate is a very stable market with great tax and financial benefits that can and should be used. It has its risks, such as low liquidity, meaning that it is an asset that can’t be transactioned in a very short-term timeframe, like stocks and bonds, but also the comissions and entries can be substancial. In perspective, real estate should be a part of any portfolio that wishes to diversify and hold real assets.

The single most powerful asset we all have is our mind. If it is trained well, it can create enormous wealth.

Robert Kiyosaki, author of Rich Dad Poor Dad