Have you ever considered investing in real estate without the drawbacks of having the duties of a landlord? Allocating one’s capital to real estate can seem like a natural part of any diversified investment portfolio and is often touted by financial experts as having a central part in any portfolio. This article will look at real estate investing, its various benefits, and the advantages of investment trusts such as BREIT (Blackstone Real Estate Income Trust).
Definition of Real-Estate Investing
Real estate investing refers to purchasing the entirety of or a portion of land or property to generate income rather than using it as a primary residence. This definition of real estate investing covers broad areas, including offices, agricultural land, commercial plots, etc. In general, the land we are referring to is immovable but also transferable. Today, almost 60% of global assets are held in the form of real estate securities.
The broad definition we are discussing also includes leasing any parcel of land or the general acquisition of rights of any parcel of land. This means that commercial property investments can and should be considered as real estate investments. Another activity that can be included in the category of real estate investing is the leasing of mineral rights on a piece of land.
Hence, we can see that real estate investing is quite broad and integrates several different investments, all centering around land and improvements upon the land.
Features of Real Estate Investing
When we talk about Real Estate investing, certain features such as long-term capital investments and analysis may come up. This section of the article will discuss the distinct features of real estate investing and how these features distinguish this asset class from other securities in your portfolio.
One of the most significant features of real estate is its physical and tangible existence. The investor owns an actual piece of land, which attracts financial institutions to fund an asset with genuine existence. In addition to this, the tangibility of the property also entails the need for greater management and an uncertain maturity period.
Since the owner controls a property that requires maintenance, the investor may have to look towards property managers to fulfill this task. Similarly, due to the owner’s complete control of his tangible property, the real estate investment does not have a maturity period like a bond. The owner decides whether to sell the asset or not. Tangibility, in short, provides greater control over the property.
Enhancement in Value
There are several features of real estate investing which can come under the banner of enhanced value. Firstly, and most importantly, the ownership over property provides the advantage of earning through rental income and seeing your property rise in general value due to market pressures. Secondly, the property is generally immune to pressures of inflation and economic recession.
Real estate is the only asset class not affected by inflation and is historically less correlated than other asset classes such as stocks when economic recessions occur. In both cases, there is indeed an opportunity for profitability.
Another facet of real estate investments is that they are much less liquid than other asset classes, such as stocks of course, but even individual bonds or collectibles are arguably more liquid than real estate.
Due to this property, many financial institutions and banks take these properties as collateral to finance investments and give loans.
One of the most popular reasons for investing in real estate is the potential to earn a steady stream of income. In this section, we will look at the main ways in which investors can make money through real estate investments. Before doing that, however, we need to distinguish between the different types of real estate properties:
Commercial Real Estate:
Refers to properties of office buildings and complexes that are divided into units and used to run various businesses.
Industrial Real Estate:
Refers to large-scale property that is mainly used for the construction of factories, warehouses, distribution centers, and other buildings utilized for industrial purposes
Residential Real Estate:
Refers to any residential unit; any form of housing, including apartment complexes, can come under this.
This broad term refers to any piece of land where economically productive activity occurs, such as ranching or farming.
This can constitute several operations, restaurants, shopping malls, or retail centers that operate in a primary location.
Now that we have looked broadly at the different types of Real Estate (note that this list does not include more complex types of properties such as Mixed Use and Fix and Flip properties), we can look towards the general means of earning through real estate investments:
Appreciation of Property Value
This is the most common way of making money in the real estate market; this is usually associated with realizing capital gains tax. As the value of one’s property increases unperturbed by pressures of inflation and recessions, an investor can make a profit through the sale of the property just as can do so by the sale of any other security such as a stock or a bond.
This is a passive way of earning income through the real estate market and is analogous to dividend payments earned through other securities. A real estate investor can rent out her premises for economic productivity or residential purposes and make a progressive passive income in the long run.
Real Estate Investment Trusts (REIT)
Real estate investments clearly entail high capital costs, and, as such, usually have institutions such as pensions and endowments or hedge funds as investors. However, the development of Real Estate Investment Trust (REIT) companies has expanded the universe of investors able to invest in real estate.
REIT companies function similarly to mutual fund firms that offer products whereby investors can pool in any amount of capital they wish.
Which kind of property types do REIT companies invest? Typically, REIT companies invest in commercial or rental properties. The investor can earn through rental and value appreciation, and the use of such trusts allows for a very diversified real estate portfolio.
An example of REITs used by firms like RVW Wealth is the Blackstone Real Estate Income Trust (BREIT). This trust prides itself on focusing on perpetual and institutional real estate investments, which prioritize rental income for all sorts of individual investors.
Their investments are non-volatile, and with a minimum investment size of just $2,500, provides real estate investment opportunities to a whole array of individual investors, not just those types of institutional investors mentioned above.
REITs also enable investors to accrue passive rental income, which is taxed more favorably than, say corporate bond interest. This passive income typically gets favorable treatment and is quite beneficial for those looking for stable sources of income to provide for education or retirement savings.
Benefits of Real-Estate Investing
Having explored the types of real estate assets available to investors, we can then ask: Is this a worthwhile asset class in which to invest? Here are some of the major benefits of real estate investing:
One of the biggest benefits of real estate investing is the control it gives investors creative improvements to the property, more flexibility in purchase deals, and finding improved ways to generate revenues. This type of control isn’t available with investments in stocks or bonds. In the case of these securities, the investor usually is forced to passively wait and see which way the value goes, with generally no control over the process of value creation.
However, at the same time, it isn’t necessary to exert this control. If an investor decides to rent out the property, they can make passive rental income and hand over maintenance duties to those agents to whom the property has been leased. In sum, we can see greater flexibility in investor roles regarding real estate assets and securities.
Protection against Inflation and Tax
Real estate investing acts as a hedge against the dual issues of inflation and taxation. Unlike most assets, real estate assets are less adversely affected by inflation pressures than other income-bearing securities, especially fixed-rate bonds. Real estate generally benefits from a rise in the general economic levels, and the value of real estate generally rises with a rise in the economy.
Similarly, real estate profits generally classify under capital gains tax, whose tax rates are favorable relative to the higher rates of ordinary income. Some gains realized from real estate transactions, such as those for the first sale of a home, are even exempt from taxes.
Real estate investing provides a stable source of income through rental property, which is the only asset that can be sufficiently used to pay off the interest on mortgages. This stability and long-run financial security allow real estate investors to borrow funds that they can use to purchase or lease properties they could not otherwise afford.
Such leverage provides a level of autonomy and self-independence, which allows real estate investors to make decisions with a much more relaxed and rational mindset. It also allows them to minimize risks since real estate properties are bound to provide a significant income and profits, which the investor can leverage. There are also benefits in greater financial security since the investor is in ownership of an actual physical piece of land.
There is also the advantage of diversified portfolios if you use real estate assets in your portfolios. This is because there is generally a negative correlation between stock values and real estate values. Having enough real estate assets in your portfolio helps you reduce your risk and increase your return per risk. It allows you to deal with volatility better since real estate assets are generally stable and calm by economic pressures.
There is also an added benefit with REITs that they are closely associated with stock values, and investing in REIT funds can help stabilize your portfolio to a very large degree. Finally, since these assets have real underlying development centered around the investor’s wishes, there is an avoidance of the principal-agent problem; both the property managers and workers and the investor have in their interest the development of the property value and value appreciation.
Real estate investments are unique and distinct from other forms of investments for several reasons; these make real estate an appealing option for investors looking for a source of stability and diversification in their portfolios. While stocks should still compose the core of the vast majority of investors’ portfolios, real estate can justifiably be included as an element of one’s long-term strategy, and with the existence and rise of more liquid vehicles such as REITs, real estate investments have become much more accessible to individual investors such as RVW Wealth clients.
October 04, 2021