Many investors have an unending love of the stock market. And why wouldn’t they? On average, the stock market has yielded about 10% per year since its inception.
However, that return is far from guaranteed. While that 10% average is excellent, not every year is created equal. Some years have been well above 10%, but others have seen negative returns.
In fact, bear markets can last several years. The longest bear market to date fell between the Great Depression and WWII and lasted 61 months. During that time, the stock market fell by 60%. Even with recession proof stocks, it’s never a bad idea to diversify your portfolio and look in other places.
And this is one of the reasons real estate investing should not be overlooked.
One of the benefits of real estate investing is that it does not directly correlate with stock market performance. We’ll elaborate more on that shortly.
First, let’s be sure we understand real estate investing and the many forms it takes today.
What is Real Estate Investing?
In the early days of real estate investing, this was a fairly straightforward answer: purchase a property, then turn it into a rental unit. Once you find a tenant or tenants, you can start collecting rent.
But as companies have continued to innovate, there are now many ways to invest in real estate. Of course, owning properties outright is still possible, but these days, we have many more options.
Let’s consider some of the ways to invest in real estate.
Become a Landlord
This is the most obvious way to invest in real estate and certainly the oldest. Many people still go this route. There are clear advantages to owning your own properties, such as having complete control over them and claiming all of the profits.
But as with most things in life, owning your own properties has its downsides. You need the initial capital to purchase a property. Even if you use discount real estate agents or buy on your own, it does cost money to claim a property that will give you a return. Not only that, problematic tenants can wreak havoc on your revenue, either by failing to pay rent or by causing damage to the unit.
And having to make frequent repairs can be quite costly, especially if you aren’t particularly handy. These issues are not necessarily the norm, but they do happen.
Alternatively, you can use a property management company if you want to own your own properties without all the hassle. Companies such as Roofstock help with this by allowing you to purchase properties that it then manages for you (check out this Roofstock review to see how they can benefit you).
Real Estate Crowdfunding
Real estate crowdfunding allows you to invest in specific real estate projects, you typically wouldn’t be able to afford on your own. This is like purchasing your own property, except that you only own a small piece of it.
That means that the investment is essentially illiquid and you can’t always cash out whenever you need the money. And because your investment is tied to the ownership of a specific property, it might be a long time before you have the opportunity to cash out.
However, crowdfunded real estate does have the potential for great returns.
Real Estate Investment Trust (REIT)
When you buy shares in a REIT, you aren’t investing in specific projects. Instead, you buy shares in a real estate company that owns dozens or even hundreds of properties.
Because you aren’t investing in specific properties, shares in a REIT can be liquidated much more easily. But you also have no control over which properties the REIT purchases.
In addition, REITs provide a more stable return due to lower risk, but that also means there is less potential for exceptionally high returns.
One benefit of REITs is that they offer some considerable tax advantages.
Benefits of Real Estate Investing
While investing in the stock market can provide great growth, real estate investing has unique advantages that make it worth considering for any investor.
After all, demand for housing isn’t going away anytime soon.
As mentioned earlier, one of the biggest benefits of real estate investing is diversification. Because the stock market can sometimes struggle for months, or even years, diversifying in the form of real estate can help during a bear market.
You might assume that the housing market must not do very well during these times. However, studies have shown this is not the case.
And, if you think about it, this isn’t too surprising. Even if people don’t have as much money to invest, they will still need a place to live. As such, buying a home will take precedence over stock market investing.
This brings us to point #2.
2. There is Always a Need
Indeed, there is always a need for real estate. Publicly-traded companies can come and go due to industry changes, among various other factors.
In some cases, entire industries can disappear. In the 19th century, there was a considerable industry built around ice cutting, where people would physically retrieve huge blocks of ice from cold places with cold climates. That is, until ice makers made the whole industry obsolete.
Such a change is unlikely to happen with real estate. People will always need a place to live. Sure, there may be trends as far as the type of homes people want, or how many bedrooms/bathrooms, but people will always need a place to stay.
3. Acts as a Retirement Hedge
One concern that is regularly expressed about stock market investing is its cyclical nature. Although the market has grown on the whole since its inception, there is a constant cycle of rising and falling, of bear markets and bull markets.
And if you are close to retirement when a deep recession strikes, it could leave you with a lot less money in retirement than you expected to have.
There are ways to mitigate this risk; namely, by weighting your portfolio more toward bonds as opposed to stocks as you move closer to retirement.
But by investing in real estate, you add another hedge to help mitigate the risk of not having enough money in retirement.
4. Tax Advantages
Depending on the type of real estate investment, you might be able to take advantage of significant tax advantages. Taxes can be one of the biggest drags on any portfolio, so this is nothing to sneeze at.
For example, if you own your own property, there are various expenses you can deduct, including not only equipment but advertising costs and others. Plus, you can depreciate the value of the property. And you can depreciate the property even if the building has not physically deteriorated.
These are just a few of the tax advantages real estate offers; that deserves an article of its own. Even REITs have tax advantages, as 90% of taxable income must be paid out as dividends to investors.
Is Real Estate Investing Right for You?
These days, just about anyone can benefit from real estate investing. Gone are the days when only those who can manage properties on their own can benefit from it.
Whether you own your own properties, use a property manager, or invest in a REIT or crowdfunded project, there are options for just about anyone these days.
In reality, the question is no longer whether real estate investing is right for you, but what is most important to you. Do you prefer to have more control or want better returns? Perhaps you want a more stable return, even if it’s not the highest return possible.
Whatever is most important to you, almost anyone can benefit from real estate investing. The diversity and tax advantages they provide will strengthen any portfolio.
Plus, there is always a need for real estate. If you haven’t considered real estate investing, you might be missing out.