The consistent cash flow potential of real estate makes it a great passive income generator. Commercial properties bring in consistent income through rents and entitlements as long as the property is occupied. For multifamily properties, multiple tenants and long leases further guarantee steady income even if some units are vacant. Cash flow is one key advantage in financing real estate as the income from rent can pay off the mortgage and even deliver residual income for the investor. The potential increase in rents payable due to inflation improves cash flow as amortization is fixed. Passive income is the foundation for wealth.
Another great benefit of real estate is the appreciation of the market value over time. Even though buildings naturally deteriorate over time, land on the other hand goes up. But with the required improvements and maintenance, the market value of the property naturally increases. For assets that have been financed, appreciation in rent and value is an opportunity for the investor to quickly increase equity since mortgage repayment remains the same. Real estate assetsâ€™ growth in value may not be significant year on year due to market downturns and so this expectation is measured over the investment horizon.
Resistance to Inflation
Inflation is when prices generally increase due to the decreasing value of the currency. This leads to higher cost of living, interest rates, cost of doing business and increasing wages. As hard assets, properties are used in the production of goods and services and therefore inflation generally results in higher property prices and increasing rent levels. So inflation is a gain for real estate – it is among the few assets that can stand up to inflation to preserve the value of cash.
When you use other people’s money to buy a property, you are leveraging. This opportunity does not exist with stocks or other types of investments because if you want 10,000 investments in stocks, you have to pay the full 10,000. With real estate, typically, a 20% payment is required from the buyer, and the rest 80% can be borrowed from a lender. What it means is that the buyer has the whole value of the property with only a fifth of the cost. If the property generates positive cash flow; that is more than enough rent to take care of the loan repayment and other operating costs, the investor enjoys residual income even while paying off the mortgage.
Real estate is tangible and stable with a level of control that measures the security of investment. An investor can determine what to do with an acquired property including fixing rent and resale prices or adding value. Properties also possess a long-term value that makes the net effect of market fluctuations less significant in the life of the investment. Unlike stock prices that can plummet in a single day, the intrinsic value of properties endures even under economic downturns. Even though real estate is not risk-free, its exposure to external factors is lower.
Another key advantage of real estate is the depreciation of the property on paper for accounting purposes. As the property grows in age, the value is depreciated to take care of deterioration leading to reducing taxes. However, in reality, the market value of properties increases over time, and therefore as more income is generated from increasing rent and market value, tax is reduced. Acquisition, improvement and legal costs, and other related expenses in real estate transactions are also tax-deductible. The overall effect is a higher after-tax yield for investors.
A key risk mitigation strategy in investment is diversification in a portfolio. Property brings stability to the investment portfolio because of its lower volatility relative to traditional investment vehicles like stocks and bonds. Increasing rents and market values which hedge against inflation also helps to offset the effect of inflation on other assets in the portfolio. The strong and consistent cash flow potential of real estate improves the overall liquidity of your portfolio even if other vehicles have crushed. Properties have shown long-term strong resilience even in market downturns and are a smart blend for a higher overall yield of investment portfolios.
Real estate is a special asset class with long-term rewards which can form the foundation for true and stable wealth. Investors who consider property in their portfolios stand to gain an overall better yield on their investments due to the strong stability that real estate brings to the portfolio.
Varcuum’s growing expertise in asset management with a focus on multifamily real estate is an all-inclusive opportunity to begin property investing easily. Our superior fractional ownership strategy allows you to invest in multifamily real estate even with little funds. Discover how property investing with Varcuum works and join our community of property investors today to receive early bird offers ahead of projects.