Real Estate Investing

Have you ever considered investing in real estate withoutthe drawbacks of having the duties of a landlord?  Allocating one’s capital to real estate canseem like a natural part of any diversified investment portfolio and is often toutedby financial experts as having a central part in any portfolio. This articlewill look at real estate investing, its various benefits, and the advantages ofinvestment trusts such as BREIT (Blackstone Real Estate Income Trust).

Definition of Real-Estate Investing

Real estate investing refers to purchasing the entirety ofor a portion of land or property to generate income rather than using it as aprimary residence. This definition of real estate investing covers broad areas,including offices, agricultural land, commercial plots, etc. In general, theland we are referring to is immovable but also transferable. Today, almost 60%of global assets are held in the form of real estate securities.

The broad definition we are discussing also includes leasingany parcel of land or the general acquisition of rights of any parcel of land.This means that commercial property investments can and should be considered asreal estate investments. Another activity that can be included in the categoryof real estate investing is the leasing of mineral rights on a piece of land.

Hence, we can see that real estate investing is quite broadand integrates several different investments, all centering around land andimprovements upon the land.

Features of Real Estate Investing

When we talk about Real Estate investing, certain featuressuch as long-term capital investments and analysis may come up. This section ofthe article will discuss the distinct features of real estate investing and howthese features distinguish this asset class from other securities in yourportfolio.

Tangibility

One of the most significant features of real estate is itsphysical and tangible existence. The investor owns an actual piece of land,which attracts financial institutions to fund an asset with genuine existence.In addition to this, the tangibility of the property also entails the need forgreater management and an uncertain maturity period.

Since the owner controls a property that requiresmaintenance, the investor may have to look towards property managers to fulfillthis task. Similarly, due to the owner’s complete control of his tangibleproperty, the real estate investment does not have a maturity period like abond. The owner decides whether to sell the asset or not. Tangibility, in short,provides greater control over the property.

Enhancement in Value

There are several features of real estate investing whichcan come under the banner of enhanced value. Firstly, and most importantly, theownership over property provides the advantage of earning through rental incomeand seeing your property rise in general value due to market pressures.Secondly, the property is generally immune to pressures of inflation andeconomic recession.

Real estate is the only asset class not affected by inflationand is historically less correlated than other asset classes such as stockswhen economic recessions occur. In both cases, there is indeed an opportunityfor profitability.

Low Liquidity

Another facet of real estate investments is that they are muchless liquid than other asset classes, such as stocks of course, but evenindividual bonds or collectibles are arguably more liquid than real estate.

Due to this property, many financial institutions and bankstake these properties as collateral to finance investments and give loans.

Income-Earning Potential

One of the most popular reasons for investing in real estateis the potential to earn a steady stream of income.  In this section, we will look at the main waysin which investors can make money through real estate investments. Before doingthat, however, we need to distinguish between the different types of realestate properties:

Commercial Real Estate:

Refers to properties of office buildings and complexes thatare divided into units and used to run various businesses.

Industrial Real Estate:

Refers to large-scale property that is mainly used for theconstruction of factories, warehouses, distribution centers, and otherbuildings utilized for industrial purposes

Residential Real Estate:

Refers to any residential unit; any form of housing,including apartment complexes, can come under this.

Land:

This broad term refers to any piece of land whereeconomically productive activity occurs, such as ranching or farming.

Retail Space:

This can constitute several operations, restaurants,shopping malls, or retail centers that operate in a primary location.

Now that we have looked broadly at the different types ofReal Estate (note that this list does not include more complex types of propertiessuch as Mixed Use and Fix and Flip properties), we can look towards the generalmeans of earning through real estate investments:

Appreciation of Property Value

This is the most common way of making money in the realestate market; this is usually associated with realizing capital gains tax. Asthe value of one’s property increases unperturbed by pressures of inflation andrecessions, an investor can make a profit through the sale of the property justas can do so by the sale of any other security such as a stock or a bond.

Rental Income

This is a passive way of earning income through the realestate market and is analogous to dividend payments earned through othersecurities. A real estate investor can rent out her premises for economicproductivity or residential purposes and make a progressive passive income inthe long run.

Real Estate Investment Trusts (REIT)

Real estate investments clearly entail high capital costs,and, as such, usually have institutions such as pensions and endowments or hedgefunds as investors.  However, thedevelopment of Real Estate Investment Trust (REIT) companies has expanded theuniverse of investors able to invest in real estate.

REIT companies function similarly to mutual fund firms thatoffer products whereby investors can pool in any amount of capital they wish.

Which kind of property types do REIT companies invest?  Typically, REIT companies invest incommercial or rental properties.  Theinvestor can earn through rental and value appreciation, and the use of suchtrusts allows for a very diversified real estate portfolio.

An example of REITs used by firms like RVW Wealth is theBlackstone Real Estate Income Trust (BREIT). This trust prides itself onfocusing on perpetual and institutional real estate investments, whichprioritize rental income for all sorts of individual investors.

Their investments are non-volatile, and with a minimuminvestment size of just $2,500, provides real estate investment opportunitiesto a whole array of individual investors, not just those types of institutionalinvestors mentioned above.

REITs also enable investors to accrue passive rental income,which is taxed more favorably than, say corporate bond interest. This passiveincome typically gets favorable treatment and is quite beneficial for thoselooking for stable sources of income to provide for education or retirementsavings.

Benefits of Real-Estate Investing

Having explored the types of real estate assets available toinvestors, we can then ask: Is this a worthwhile asset class in which toinvest?  Here are some of the majorbenefits of real estate investing:

Control

One of the biggest benefits of real estate investing is thecontrol it gives investors creative improvements to the property, moreflexibility in purchase deals, and finding improved ways to generate revenues.This type of control isn’t available with investments in stocks or bonds. Inthe case of these securities, the investor usually is forced to passively waitand see which way the value goes, with generally no control over the process ofvalue creation.

However, at the same time, it isn’t necessary to exert thiscontrol. If an investor decides to rent out the property, they can make passiverental income and hand over maintenance duties to those agents to whom theproperty has been leased. In sum, we can see greater flexibility in investorroles regarding real estate assets and securities.

Protection against Inflation and Tax

Real estate investing acts as a hedge against the dualissues of inflation and taxation. Unlike most assets, real estate assets are lessadversely affected by inflation pressures than other income-bearing securities,especially fixed-rate bonds.  Real estategenerally benefits from a rise in the general economic levels, and the value ofreal estate generally rises with a rise in the economy.

Similarly, real estate profits generally classify undercapital gains tax, whose tax rates are favorable relative to the higher ratesof ordinary income.  Some gains realizedfrom real estate transactions, such as those for the first sale of a home, areeven exempt from taxes.

Leverage

Real estate investing provides a stable source of incomethrough rental property, which is the only asset that can be sufficiently usedto pay off the interest on mortgages. This stability and long-run financialsecurity allow real estate investors to borrow funds that they can use topurchase or lease properties they could not otherwise afford.

Such leverage provides a level of autonomy andself-independence, which allows real estate investors to make decisions with amuch more relaxed and rational mindset. It also allows them to minimize riskssince real estate properties are bound to provide a significant income andprofits, which the investor can leverage. There are also benefits in greaterfinancial security since the investor is in ownership of an actual physicalpiece of land.

Diversification

There is also the advantage of diversified portfolios if youuse real estate assets in your portfolios. This is because there is generally anegative correlation between stock values and real estate values. Having enoughreal estate assets in your portfolio helps you reduce your risk and increaseyour return per risk. It allows you to deal with volatility better since real estateassets are generally stable and calm by economic pressures.

There is also an added benefit with REITs that they areclosely associated with stock values, and investing in REIT funds can helpstabilize your portfolio to a very large degree. Finally, since these assetshave real underlying development centered around the investor’s wishes, thereis an avoidance of the principal-agent problem; both the property managers andworkers and the investor have in their interest the development of the propertyvalue and value appreciation.

Conclusion

Real estate investments are unique and distinct from other forms of investments for several reasons; these make real estate an appealing option for investors looking for a source of stability and diversification in their portfolios.  While stocks should still compose the core of the vast majority of investors’ portfolios, real estate can justifiably be included as an element of one’s long-term strategy, and with the existence and rise of more liquid vehicles such as REITs, real estate investments have become much more accessible to individual investors such as RVW Wealth clients.

October 04, 2021 RVW Wealth