Why Real Estate?
Real estate is the quintessential Wealth Builder. Historically, changes in real estate values have not been directly correlated with fluctuations in asset classes such as stocks, bonds or currency markets. So, even when the broader financial markets are in chaos, real estate provides a solid investment alternative.
So what makes real estate such a lucrative wealth building tool?
Listed below are four reasons we feel real estate is a great investment…
now and for years to come.
For most assets, production can be manipulated to match demand. Not true with real estate. There is a fixed supply. According to the US Census Bureau, the total US population is expected to reach 392 million people in the next decade. That means more people trying to get their piece of a limited resource; more people who want hotel rooms, offices, apartments and homes.
Other People’s Money (OPM)
This is a term that has recently become popular, but it is a long lived concept. Using other people’s money increases purchasing power. In financial jargon it is called leverage, which simply means borrowed money. The concept of leverage is that by borrowing a portion of the purchase price, you can make a much larger real estate purchase. With a small down payment it is possible to own a large asset and once the property is paid off it leaves pure income and equity. Better yet, if the property is leased, the mortgage payments are made by someone else!
Interest Rates are at historic lows, which means, what you pay for a mortgage and what you can receive for rent is a wider gap. That means positive cash flow. Now is an optimal to capitalize on inexpensive money. In some cases it might even be possible to borrow the initial investment, paying for the cheap loan and still making a profit.
Did you know that a nickel 100 years ago is equivalent to a dollar today? Over periods of time we have had steady inflation. Real estate is an excellent hedge against inflation. In fact, those who own real estate actually make money during inflationary times. Sure, the cost of gas and butter increase, but those that have significant real estate holdings build wealth by raising rents which leads to more revenue and increased property values.
Clearly there have been cycles in the past where property values have plummeted; most recently, in 2008. There will likely be more cycles of highs and lows. However, owning real estate is a great long-term strategy to build wealth. Adding real estate to any investment portfolio is not only a proven way to build wealth but real estate investments can provide an additional degree of diversification to an already diversified portfolio.