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 building wealth.
Cash flow
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 source of dividends generated from rental income. Arrived offers monthly dividend payments paid directly to investors through their Arrived Cash Balance.
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, particularly in specific sectors, will consistently require commercial properties for rent. You’ll always want to stay in that beachfront property during your holiday. The necessity of real estate can make it a safe and secure investment.
For instance, as of 2023, 34% of the population rents their homes, providing landlords with a steady pool of tenants to occupy their investment properties.
Depending on your investment approach, you may experience less volatility than alternatives like stocks. Public REITs often fluctuate with the stock market, responding quickly to economic changes. Conversely, private real estate investments typically absorb market shifts more gradually, allowing more time for analysis and adjustments in 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 provides a greater sense of ownership and security. Even if you invest fractionally in real estate located many states away, that real estate still holds 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 leveraging debt can be a smart strategy. With good credit, a steady income, and the ability to repay, you can often start with a down payment as low as 10%.
Financing real estate is also relatively affordable. Mortgage rates tend to be lower than other borrowing options, like personal loans, and a fixed-rate mortgage lets you lock in your interest rate for up to 30 years, providing long-term cost stability.
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. You can defer those capital gains if you use the money from selling one property to buy another.
Real estate can hedge against inflation
Real estate can serve as a 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 increase over time, but you can also actively increase its worth through 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 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. You could use that $80,000 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 assets 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 is a long-term commitment, but it has distinct advantages over other investment options. Rental properties can generate consistent income through rent, while real estate values typically appreciate over time, leading to potential capital gains when you sell.
It’s not just the structures that gain value—the land can appreciate, especially in high-demand markets. Your equity grows as you pay down your mortgage, and the value of the property increases. When it comes time to sell, you benefit from appreciation and accumulated equity, maximizing your overall returns.
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 rental homes and the Arrived Single Family Residential Fund and Private Credit Fund start at a $100 minumum investment. Real estate investing provides the opportunity for steady cash flow and long-term growth, making it an attractive option for those seeking both stability and strong returns.
Whether you’re starting with fractional investments or leveraging equity to expand your portfolio, real estate offers diverse and resilient opportunities. With its ability to hedge against inflation, unlock tax advantages, and generate forced appreciation, it remains a powerful strategy for building wealth over time.
Disclaimers
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice.
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