Why Real Estate Is an Attractive Industry for an Investment Portfolio (2024)

The real estate asset class is one that is an important part of any investment portfolio. Real estate as an asset, is one of the best there is. The tax benefits, appreciation, residual income, and financing opportunities are second to none. The asset class itself offers you a lot of various avenues for upside, and different ways to grow your capital or generate returns. There are various different sub classes of real estate like industrial, development, hotel, office, and multifamily. Please note, none of this is to be considered financial advice, should you need financial advice, you should consult a professional.

One of the building blocks of an investment portfolio is diversification. Diversification allows you to spread your risk over different asset classes, different investments, and different industries. Diversification allows you to solidify the assets you have, while spreading your eggs into multiple baskets. A lot of people want to preserve the work, time, and energy they’ve invested, and one of the ways to do that is through diversification.

Real estate generally appreciates over time. Depending on the market, the location, and the type of asset will determine the amount of growth a property experience. A lot of this is due to increased demand for housing, population growth, or a rise in inflation. Inflation is another important facet behind the appreciation of real estate. Over time, as inflation compounds and rises in the economy, real estate rises as well. Every year inflation is 1%-2%-3%, it rises over the prior year’s value, and prior year’s growth. A lot of people use real estate as a hedge against inflation. It protects the amount of money you have, and as inflation rises, so does the cost of living. As the cost of living rises, so does the cost or value of real estate.

Another great aspect that real estate has to offer is the ability to refinance a property. Refinancing a property allows you to pull out equity from the property in a tax-free fashion. As the value or price increases, you’re able to take out some of the equity from the appreciation or after enough of the financing is paid off. An important element of refinancing is the tax-free nature of the funds that it produces. The money that comes out of a property through a refinance is tax-free or tax exempt. This is incredibly important when you’re measuring and evaluating a property’s or investments return after taxes.

Real estate’s return after taxes is one of the reasons many investors pursue the asset class. With real estate, in addition to the tax-free nature of the funds from refinancing, you’re also able to deduct depreciation and interest expenses from your income. This allows you to shield part of your income through real estate. The tax shelters and shields behind real estate encourage a lot of investment and contribute to a significant portion of the returns that real estate generates. Calculating some of these returns is sometimes tricky, and a bit complicated. If you’ve ever wondered what does a real estate analyst do? A lot of what they do is calculating and figuring out the different returns a property or piece of real estate might produce under certain assumptions.

Real estate produces monthly revenue to landlords in the form of rent. Rent is paid by tenants each month, in order to use or utilize the space a landlord owns or controls. Every month, tenants pay the landlord, and the landlord collects payment. As an owner or landlord in real estate, you’re entitled to get monthly money or residual income every month your property or space is utilized. This means you’re able to have a strong and stable income every month at a certain date.

Shelter is something that every person and every human need. Everyone needs a place to live. That’s the essence behind real estate. People will always need a place to live, meaning real estate is something that isn’t going out of style anytime soon.

Purchasing real estate or investing in real estate gives you an asset that’s tangible. That means you can touch, feel, and see the asset physically in the world. A lot of the assets nowadays aren’t tangible, meaning their electronic or electronic based. There isn’t anything you have except a stock, share, or right to receive part of the future income stream of a company.

There are a variety of ways to invest into real estate. One way, or the way we’ve primarily focused on is by buying or investing directly into a piece of real estate. A lot of the benefits we’ve mentioned are only available to the owner or operator of a property. You also have the ability to purchase shares of a real estate company or a real estate portfolio through a REIT.Real Estate Investment Trust is a publicly traded company or portfolio of real estate assets.

Conclusion

Making real estate apart of your portfolio is something worth considering. The different benefits, the several ways of financially benefiting from it, and the diversification it offers you are some of the benefits of exploring real estate. Diversifying your portfolio so all your eggs aren’t in one basket is something people have stood behind for long times. It gives you the ability to increase the value of your assets slowly and steadily and mitigates some of the risk from an individual asset or asset class. The residual income that real estate produces allows you to receive monthly distributions and money from a piece of real estate. The tax benefits behind refinancing a piece of real estate are a great way to increase the after-tax returns of the investment. The depreciation deduction, as well as the interest expenses reduction gives you other ways to increase your after-tax return as well. The real estate asset class itself will be around for a long time to come. People will always need a place to sleep, and shelter. The physical nature of a piece of real estate allows you to see, touch, and feel where your money is being invested into.

Howie Bick is the founder of The Analyst Handbook. The Analyst Handbook is a collection of 16 guides created to help current and aspiring Analysts advance their careers. Prior to founding The Analyst Handbook, Howie was a financial analyst.

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