It is often said that wise investors do not pin all their hopes on one market or asset, but rather build for themselves a wide-ranging portfolio of investments which serves to protect against unexpected fluctuations and negative movements.
But whether an investor chooses to diversify or to take a chance by specializing in one particular area, few will choose to overlook property as an integral feature of their overall investment strategy.
There are so many reasons why investing in real estate makes so much sense. Here are just a few of them:
#1: Diversification Provides Stability and Reassurance
Most serious investors will try to minimize the risk of downturn through what is called “asset class diversification” . Put simply this means protecting against potential losses in one area of activity by simultaneously investing in others. The rationale of such a strategy is that when an otherwise successful business person is unlucky enough to become involved in an asset or commodity which performs badly any losses, even temporary ones, will be offset by gains in other areas.
#2: Renewable Capital Is a Source of Leverage
One big advantage of real estate is that as a fixed asset it is easy to refinance, enabling investors to free up capital to invest in other areas as and when necessary. The authoritative news organization Reuters reported recently that: “Although mortgage rates are tied to the U.S. benchmark 10-year Treasury note, they are sensitive to global economic trends. The people who need to pay the most attention are homeowners who are eligible for refinancing. Some 6.8 million borrowers currently could benefit from a refinance.“
#3: Create Cashflow Through Letting
Real estate usually appreciates in value just by being there. Nevertheless its benefit can be maximized by putting it to work, in other words letting out to short-term or even longer term tenants for a guaranteed regular rent payment. As well as generating some much needed income having a property in regular use helps with its physical upkeep.
#4: Tax Benefits
In most jurisdictions tax is payable on real estate only at the point of disposal, as opposed to when value appreciation actually takes place. Even when a property is sold it may under some circumstances be exempt from tax, as with a “1031 exchange” in which, under certain rules, “like kind” properties may be exchanged within a stipulated time frame. When renting out a property it is also possible, in certain situations and subject to strict provisos, to offset some tax liability against natural depreciation.
#5: Exploit Market Cycles
An effective understanding of market cycles enables investors to buy low and sell high, thereby maximizing profits from the purchase of property. Whilst it is difficult always to know when a market has reached the bottom of the real estate cycle, observing an upward trend and taking the appropriate action can translate into strong returns once the market has picked up again. Understanding the market is an art, but getting it right can bring great dividends.