When most of us first think of investing in real estate, the first thing that comes to mind is owning your own home. These days, however, the options are vast, you can invest your capital in an array of properties – from office buildings, shopping malls and hotels to infrastructure such as mobile phone towers or energy facilities. And the asset doesn’t have to be physical, with vehicles such as trusts and funds offering investors the opportunity of healthy returns and appreciation.
Real estate can provide solidity, diversification and power of leverage
What is it about bricks and mortar that continue to draw so many investors through the door? For one, real estate is a highly tangible asset that continues to hold its value even in tough market conditions when other assets risk turning to rubble. Real estate values generally don’t experience the volatility associated with equities and bonds, for example. There’s a limited amount of real estate, which, combined with population growth – especially in urban areas – keeps demand buoyant. Historically, the value of real estate has grown consistently over time.
Another advantage of real estate is its important role in diversifying your portfolio and mitigating risk. Real estate has a low correlation with other major asset classes – when equities are down, for example, real estate is often up. It also provides a useful hedge against inflation, as rents and sale values also tend to keep pace with rising prices.
What’s more, you can typically take out a loan to cover a large part of the property’s value. This means you can use a relatively small down payment, say 20 percent of the purchase price, to control a much larger investment. If your asset increases in value, you generate returns on your investment as well as on the money you borrowed. This is an example of how ‘leverage’ can magnify your returns.
Direct or indirect? Locality and liquidity will be important factors
Direct real estate investing
One of the major attractions of direct real estate investment, where you purchase the physical asset, is that it can lead to higher returns – both through rental income and the appreciation of the value of the property or land, which generates capital appreciation. Bear in mind, however, that direct investments often require a hands-on approach. If you purchase properties to rent out, for example, you are responsible for collecting the rent or making repairs – although many direct investors choose to work with property management companies. And when it comes to real estate values, it’s all about location, location, location – so having a sound understanding of the local market as well as local demographics and economic trends can give you an edge.
Indirect real estate investing
In many cases, the barriers to direct entry into real estate investing can be as lofty for investors as the structures they’re seeking to invest in with office buildings, apartment blocks and hotels in prime locations costing nine-figure sums. A less capital-intensive and more liquid approach is to invest in real estate or infrastructure ‘indirectly’ through instruments such as real estate investment trusts (REITs) or exchange-traded funds (ETFs). This form of investment sees you own shares in a real estate portfolio with the chance to benefit from both income and capital appreciation.
Such indirect real estate investments offer the advantage of being highly liquid, as they can be bought and sold on major exchanges, just like equities. Investors gain exposure to the real estate market without having the trouble of buying and managing the property. And because of the lower capital required, indirect investments also offer greater scope for diversification, as investors can spread their capital more easily across different sectors.
How to increase your chances of a structurally sound real estate portfolio
There are opportunities in real estate across both the residential and the commercial sector. Analysts expect global real estate to reach a staggering USD 638 trillion worldwide by 2024 – that’s more than the value of stock and bond markets combined.
However, it’s important to be aware of the risks and maintain realistic expectations. Real estate doesn’t provide an immediate gain and it can take many years to generate positive returns or recoup your initial investment. Despite being unrivalled in terms of historical returns, your investment doesn’t always increase in value in the short term – changing interest rates and market dynamics can lead to downturns, as witnessed during the 2008 Housing Bubble which bulldozed returns in the United States and many other parts of the world.
Ensure that you don’t come up against a brick wall by consulting a real estate investment specialist who knows the local market. In this way, your own investment preferences, expectations and risk parameters can be used as bearing walls that keep your portfolio standing strong in all economic weathers.