Learn how real estate compares to other types of investments and how it can help you diversify your portfolio.
There are so many different ways to invest your money from stocks, bonds to crypto, NFTs, gold and so much more… So why (also) invest in real estate?
With the ability to earn consistent rental income, a historical track record of appreciation over the long-term, low volatility and capacity to hedge against inflation, real estate has proven to be one of the best methods to build your wealth over time. It has been used by so many great investors to diversify and strengthen their portfolio. At Brxs we want everyone to have access to the same benefits of real estate investing. Here is an overview of some of the important ones:
As we highlighted in our first article, the most important lesson in investing is to not put all your eggs in the same basket. All investing brings risk so if one basket is down, your other baskets might save your portfolio from getting hit too hard. This is especially true for private real estate, because of its historical low correlation with the stock markets, meaning that stocks and real estate don’t necessarily go up and down together in the same period (Source: The rate of return on everything).
So sure, Stocks and ETFs are great investments, but by adding real estate you can reduce your risk and help you create a more stable and profitable portfolio.
Real estate provides you a steady income as you receive rent from the tenants in your properties. While there is a risk of vacancy, rental income from a good property tends to be very predictable and consistent: the same amount every single month or quarter arrives in your bank account. Other income producing assets like dividend stocks fluctuate more from year to year; in some years with no payments at all. That is why real estate is often used by investors to build their passive income, ie. an extra income stream outside of their employment or professional activities, and contribute to achieving their financial independence.
Real estate has historically shown a very strong and steady increase in value over the long-term. Looking at the period 1995 till 2020 in Amsterdam, while there have been two dips in value in the periods 2002-2004 and 2008-2013, over the entire period the value has increased at an average 7.1% per year (Source: CBS). This is specifically the case in Urban areas due to the growing population, migration to cities, inflow of expats, reduction of household size and a housing supply that does not follow demand. And while we can never predict the future, these trends are expected to continue in the foreseeable future.
Source: CBS / KADASTER
Another great benefit from real estate is that it provides easy access to relatively cheap debt in the form of a mortgage. This mortgage allows for a leveraging effect because you are not using only your own capital to purchase the property.
Let’s illustrate this leveraging effect with a simple example:
A 400K apartment for which you only put down 80K of your own capital and 320K through a mortgage. If the property appreciates 10% in the next year, then your investment is now worth 120K (80K initial capital + 40K value increase) or a 50% return. This is a much greater return on your investment then the 10% if you would have bought the apartment entirely with your own capital.
If you’ve invested in crypto, you’re most probably well aware of what volatility is, where prices of certain coins can go up double digits some days, they can also go down double digits other days (especially if Elon Musk is tweeting). And while stocks tend to be less volatile then crypto, they can still bounce up and down very frequently. This rollercoaster feeling can be quite emotionally draining if you follow your portfolio on a daily basis, it also means more risk. Real estate on the other hand has historically shown lower volatility and can bring some more stability and steady returns to your portfolio. Multiple reasons for the lower volatility: 1) they are traded in separate places 2) different dynamics as you are not selling a property at the speed as a stock 3) properties are an absolute necessity as we all prefer a roof above our heads, then a stock in our wallet.
Of all asset classes, real-estate is the most closely correlated with inflation. When prices go up, not only residential real estate valuations tend to go up but also rents tend to increase as most rental contracts have a clause allowing yearly rent increases to follow inflation, providing you a potential hedge and protection against inflation.
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