Among the many investment vehicles, real estate stands out with unique features that make it great potential for stable wealth creation. Stocks, bonds, mutual funds, Treasury bills, and fixed deposits are all types of investments with similar characteristics available to investors. However, these key advantages of property investing truly qualify it as a high asset class at the base of wealth creation.
The consistent cash flow potential of real estate makes it a great passive income generator. Rental units or commercial properties bring in consistent periodic income through rents and entitlements. If managed well and vacant periods are reduced, a positive cash flow could be achieved from rents paid monthly, quarterly, or as agreed. The potential increase in rents payable due to inflation is an added advantage since mortgage payments remain the same.
Hedge against Inflation
Real estate is among the few assets that can stand up to inflation. Inflation is when prices increase because the value of the currency has decreased. With the rise in inflation, the cost of living; underpinned by properties, rentals traditionally go up thus more income. This means that the value of the property goes up to compensate for the inflation. So inflation is a gain for real estate.
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 cost, the buyer would start enjoying passive income even while paying off the mortgage.
Another great benefit of real estate is that the value appreciates over time. Even though buildings naturally deteriorate over time, land appreciates and therefore the entire value of the property goes up. While the property appreciates in value, the mortgage remains the same and so an investor can hold the property for some time and sell at a higher price, pay off the balance on the loan, and make a profit.
Equity is an investor’s ownership interest in a property. For real estate acquired through debt; that is leverage, interest, or equity in the property increases as the debt reduces. So as the investor pays off the mortgage, equity increases and that is the investor’s worth.
Real estate is control and the level of control with an investment is a measure of its security. An investor can determine what to do with an acquired property including fixing rent and resale price. This is absent with stocks as an investor in stocks has no control over the share price or the success of the company. Even though real estate is not risk-free, its exposure to external factors is lower.
The bottom line is real estate stands tall among other investments because of the above benefits that are largely absent from others. Adding real estate to one’s portfolio brings stability and a base for long-term wealth creation.