When it comes to investment classes, real estate can offer security, reliable cash flow, and asset appreciation. And this is why, even in down markets, real estate investing is many investors' primary way of wealth-building.
Cash Flow Is Regular
The predictability of rental income is one of the biggest reasons to invest in real estate. As long as you have tenants, rental income is money you can usually count on. While maintenance costs and non-payment of rent can happen, these payments are typically consistent as long as you have tenants in place.
Fractional real estate investing can also be a predictable source of dividends. Arrived offers monthly dividend payments directly to investors through Arrived Wallet.
Real Estate Is a Historically High-Performing Asset
Real estate is known for its historically high returns.
According to a study commissioned by Arrived in 2021, investing in single family rental homes over the preceding 20 years would have resulted in an 11.7% annual return on investment — outperforming the S&P 500’s annualized return of 9.43% during that same period.
Real Estate Can Be Consistent
People will always need a place to live. Businesses, especially in specific sectors, are always going to need commercial properties to rent. You’ll always want to stay in that beachfront property on holiday. Real estate's necessity can make it a safe and secure investment.
For example, as of 2023, 34% of the nation rents their home, giving landlords a steady pool of tenants to fill their investment properties.
Depending on how you invest, you may have less volatility compared to other investments like stocks. Public REITs often fluctuate with the stock market, reacting quickly to economic changes. On the other hand, private real estate investments tend to absorb market shifts more gradually, providing more time for analysis and adjustment of investment strategies.
Real Estate Helps Diversify Your Investments
Investment diversification is crucial for mitigating risk and maximizing returns in a portfolio. By spreading investments across various asset classes, diversification helps reduce the impact of volatility and downturns in any single investment.
Diversification also enables investors to capture opportunities for growth in different areas, balancing out potential losses with gains from other investments. Overall, it promotes stability and resilience in a portfolio, enhancing the likelihood of achieving long-term financial goals while minimizing exposure to undue risk.
Fractional real estate also has the added benefit of letting you diversify even further by spreading your property investments across several real estate markets nationwide rather than just the ones in your immediate area.
Real Estate Is Tangible
There is something to be said about a tangible asset — something you can see and touch that gives you more of a sense of ownership and security.
Even if you make fractional investments in real estate many states away, that real estate still has inherent physical value because it consists of land and buildings.
You Could Access Lower-Cost Financing
Real estate is one of the few investment classes where borrowing money can make sense. As long as you have good credit, a steady income, and the ability to pay back the loan, you may be able to get started with a down payment as little as 10%.
Debt financing in real estate can also be cheap. Mortgage rates have been consistently lower over time compared to other forms of borrowing like personal loans. And if you opt for a fixed-rate mortgage, you’ll lock your interest rate for up to 30 years.
You Could Capitalize on Tax Benefits
While homeowners don’t get a lot of tax advantages, buy a home as an investment, and suddenly, you have options.
As a real estate investor, you’re eligible for several tax breaks and benefits like deductions for:
- Incurred expenses to maintain the property
- Your travel costs to the property
- Property management fees
- Insurance
- Marketing expenses
When you sell your property, any gains will be taxed as capital gains, not income, which are taxed at a lower rate. If you use the money from selling one property to buy another, you can also defer those capital gains.
Real Estate Can Hedge Against Inflation
Real estate can often hedge against inflation in three key ways:
- Rising Rent Income: When inflation occurs, the prices of everyday goods and services, including rent, tend to increase. If you own a property and rent it out, you can often increase the rent in line with inflation.
- Property Appreciation: Inflation typically leads to an increase in the value of assets like real estate. As the cost of goods and services rises, the value of properties tends to appreciate over time.
- Locked-in Interest Rates: In times of inflation, while rent prices rise, interest payments for fixed-rate mortgages remain the same. This can increase your property's cash flow as the rental income increases while your mortgage payments stay constant.
You Could Benefit From Forced Appreciation
Real estate investing is special because property value can go up over time, but you can also actively increase its worth through what's called forced appreciation.
Here's how it works: You buy a property priced lower than its actual value, then spruce it up. You can significantly boost its market price by making improvements like renovations or upgrades. This added value from your efforts translates into higher revenues. Whether it's simple tweaks like revamping the interiors or significant changes like installing a pool or modernizing the kitchen, these enhancements can raise the property's overall value and increase the rental income you can generate.
(Look into the BRRRR method for more insights into this strategy.)
You Could Leverage Your Equity
Imagine owning a house worth $200,000, and you still owe $100,000 on your mortgage. Your equity in the home is the difference between its value and what you owe, which in this case is $100,000.
Here's where it gets interesting: You can use this equity as a financial resource to invest in more real estate. Let's say you want to buy another property. Instead of saving up a big chunk of money for a down payment, you can borrow against the equity in your current property.
So, using our example, if your equity is $100,000, you might be able to borrow up to $80,000 against that equity. This means you could potentially use that $80,000 to put down as a down payment on another property.
This strategy can help you grow your real estate investments without coming up with a lot of extra cash upfront. It's like using the value of your existing investments to fund new ones, which can be a smart way to build your real estate portfolio over time.
Real Estate Can Provide Long-Term Security
Investing in real estate requires a long-term commitment, but it offers several advantages over other types of investments. Real estate can provide a steady income stream through rent payments if you rent out the property. Additionally, over time, real estate tends can increase in value, resulting in capital gains when you decide to sell.
It's not just the buildings on the property that appreciate; the land can become more valuable, particularly in certain markets. As you continue to pay off the loan on the property and its value appreciates, your equity in the property grows. This means that when you sell the property, you'll benefit from the appreciation of the property's value and the increase in your equity, resulting in larger capital gains.
You Can Start Small
Many people feel priced out of the single family residential market right now, but that doesn’t have to keep you from investing in real estate.
There are options available to you outside of the traditional models. REITs (real estate investment trusts) and fractional investing are two models that allow you to get started for as little as a few hundred dollars, which means that you don’t have to scrimp and save for years before you can start building your real estate portfolio.
For example, Arrived’s portfolio of single family residential and vacation homes and the Arrived Single Family Residential Fund start at a $100 investment.
Overall, investing in real estate offers cash flow and the potential for significant long-term returns, making it a solid choice for investors looking for stability and growth.
Whether starting small with fractional investments or leveraging equity for further acquisitions, real estate provides diverse and resilient portfolio opportunities. With its ability to hedge against inflation, capitalize on tax benefits, and generate forced appreciation, real estate remains a cornerstone for wealth-building strategies.
Ready to start building an investment portfolio? With Arrived’s single family residential and vacation property offerings, you can invest in individual properties in your preferred markets. Rather keep it simple? The Arrived Single Family Residential Fund offers one-click diversification starting at $100.
