Investing in real estate is a great way to start investing, and it can be done by anyone. There are numerous reasons for investing in real estate, including its potential to help protect against inflation. Other benefits of investing in real estate include portfolio diversification, tax exemptions, and leverage.
Investing in real estate offers inflation protection
Inflation can be a negative force for many investors, but real estate can provide an inflation hedge. Investing in a property that is on the rise in value can offset the negative effect of inflation by increasing the equity in the property. This way, if the value of your home increases, so will the rent you receive.
Investing in real estate also provides investors with the protection of capital appreciation. This inflation-protected capital gain is especially beneficial for investors who want to hold their investment for long periods. A long-term hold period of at least 17 years is recommended. Real estate also has a lower correlation to inflation than the UK equity market.
The relationship between real estate and inflation is nuanced. Investing in real estate is best suited to long-term investors who will be able to ride multi-year real estate cycles. This way, they can gain the inflation protection they need and enjoy the stability of a steady income. Long-term real estate owners can also benefit from strong long-term capital preservation. However, investors should be aware that short-term leases and frequent rent reviews catch up to inflation more quickly than longer-term leases.
Portfolio diversification
When investing, diversification is a key component of your overall investment strategy. It helps you avoid the risk of overexposure to one asset class. A well-diversified portfolio will also help you withstand the economic downturn. But it requires discipline and regular decisions. Diversifying your portfolio will help you maximize your investment returns in tough times.
Real estate is a great way to diversify your portfolio. This asset type has low volatility and low correlation to other assets. In addition, it has higher appreciation potential. As a result, investors may choose to invest in real estate when they want to reduce their risk. Diversification can also help you protect your portfolio from inflation and rising interest rates.
Another advantage to investing in real estate is the fact that its prices tend to be less volatile than other assets. In contrast, stocks and indexes are more volatile and may even have higher risks than real estate. Real estate is a tangible asset, unlike stocks and mutual funds. This means it will not undergo drastic changes in price over a weekend or a month.
Leverage
The most common form of leverage when investing in real estate is a home loan. Typically, home buyers put down a small down payment and borrow up to 80% of the property’s value. A second form of leverage for real estate is using the equity from one property to purchase another. Although this is considered leverage, the money is not being borrowed from other people.
When investing in real estate, investors use the principle of leverage to increase their returns and lower their risks. The amount of leverage an investor can use depends on the type of real estate deal they’re making. For instance, if they’re buying a small apartment building for $500,000, they typically put down 20%. But they still owe $400,000 in interest to the lender.
While leverage is an important part of investing in real estate, it can be dangerous if not used wisely. Too much leverage will lead to excessive monthly payments and other expenses, and it can result in the loss of a home or other asset. It also hurts your credit score, and it will affect your ability to get future loans.