Savvy investors must consider a wide range of different asset classes to make their portfolios strong. The best investors include many complementary assets so they can achieve consistent growth and compensate for drawbacks and weaknesses.
One key asset class is real estate, and it’s central to millions of portfolios. But should all investors consider including real estate in their portfolios?
The Potential of Real Estate
According to Eddie Garcia of Estate.co, “Investors appreciate real estate because of its unique blend of advantages, from passive revenue generation to insulation from stock market volatility. If you know how to utilize it, it can benefit almost any portfolio.”
These are some of the greatest advantages of real estate:
• A long, reliable history. Real estate has been an excellent-performing asset for decades in the United States. It has a long, reliable, mostly stable history that every investor can appreciate. Although past performance isn’t strictly indicative of future performance, it does give many investors exceptional confidence. They understand that this investment has performed well over the years because of its necessity and because of our country’s overall growth. It’s likely that this advantage will remain for decades to come.
• Passive revenue generation. Investors also appreciate the potential for real estate to generate income passively. If you can secure a property capable of generating rent in excess of its ongoing expenses, you can pocket the difference every month. It’s consistent enough to serve as retirement income, it can help you snowball savings to fund the purchase of another property, or it can simply add to your portfolio growth.
• Countless options. There are many different ways to invest in real estate, making the asset class appeal to a wide range of investors. You can choose residential or commercial real estate, you can choose single-family or multifamily homes, and you can even invest in trusts designed to indirectly expose you to the real estate market.
• Indefinite necessity. People don’t always want expensive cars or new technologies, and almost every sector of the broader economic market has vulnerabilities. However, people have always needed houses and they will always need them in the future.
• Real property. Some investors also appreciate that investing in real estate means investing in real property. Instead of something digital or intangible, you’ll be investing in something that has genuine practical use.
• Insulation from other markets. Real estate is relatively insulated from other markets. Even when the stock market is performing poorly, real estate can do quite well. This makes it an excellent complementary asset to consider.
The Weaknesses of Real Estate
There are some weaknesses and drawbacks associated with real estate, however, complicating it as a choice for all investors.
• Capital requirements. You don’t need to purchase a house in cash to invest in real estate, but you’ll still need to save up a down payment. Even if you’re buying a piece of real estate in a relatively inexpensive area, that still means you’ll need thousands of dollars before you can begin investing. Compare that to the stock market, where you can literally get started with $20.
• Due diligence requirements. Buying a property is a big decision, even for people who already have significant wealth. Often, you’ll be buying a property worth six figures or more, so it’s important to do your due diligence. The time and effort required to determine whether a property, or even a specific neighborhood, is worth investing in is more than many investors are worth making.
• Management needs. On top of that, even the best rental properties aren’t perfectly capable of generating revenue passively. They require ongoing maintenance and upkeep, and property owners are responsible for responding to emergency requests and maintaining a habitable environment. Hiring a property manager can help you address many of these responsibilities, but it’s not a perfect solution.
• Timing difficulties. Many investors find timing the real estate market to be difficult, if not impossible. A good, consistent investing strategy can easily mitigate this, but it’s still a turnoff for many investors.
Do note that most, if not all of these disadvantages can be avoided or at least compensated for via real estate investment trusts (REITs). REITs allow you to indirectly invest in the real estate market by investing in a company that buys, managers, and sells real estate. You can buy shares of REITs like shares of stock.
Is Real Estate a Good Fit for Every Investor?
So was real estate a good fit for every investor? The simple answer is no. It’s important to maintain a diversified portfolio that includes a variety of different assets, but even though most investors can benefit from including real estate in that mix, it’s not a perfect fit for everyone.
