23 Sep 2021
Most people dream of buying a property, either as a home or as an investment, or perhaps both. It seems there’s something deeply instinctive within us that drives this desire to be property owners.
Below we will take a look at the six top reasons why you might like to choose this asset class as an investment.
1. Portfolio diversification
Diversification - the practice of spreading your investments into different asset classes to help reduce volatility within your portfolio over time - is your best weapon to sidestep risks and seize opportunities to build wealth.
A properly diversified portfolio will be across asset classes, sectors, regions, and currencies. The diversification benefits of direct and indirect property investments are well known, and diversification’s role in institutional portfolios has been investigated extensively. The different correlations of property to those of stocks and bonds are considerable and, therefore, helpful for avoiding portfolio volatility.
If you invest in a property it will typically appreciate. For sure, there will be events like the crash of 2008, but they aren’t common and over a long-term horizon you can expect homes and land to appreciate, meaning your initial investment is worth more than when you paid for it.
In addition, you can actively push the appreciation by renovating, extending or improving the property to add extra value.
3. Leverage equity
You can leverage the equity in your property to further your investments, which has become an increasingly popular option for investors in recent years.
For instance, you could take out 80% of the value, using what remains to invest in another home. This way you expand your property portfolio without having to wait until you have enough money saved for the deposit.
4. Cash flow
You can rent out your investment property and generate a monthly cash flow from it. And, of course, you get the capital gain when/if you sell it.
5. Tax breaks
Property investors can take advantage of various tax breaks and deductions, dependent on the jurisdiction, that can reduce the overall tax burden. Typically, you can deduct the reasonable costs of owning, operating, and managing a property.
6. Hedge against inflation
Due to the positive correlation between GDP growth and the demand for property, real estate acts as an inflation hedge. Real estate generally holds on the purchasing power of capital by passing some of the inflationary pressure on to tenants and by building in some of the inflationary squeeze by way of capital appreciation.