4 Reasons Why Real Estate Is a Good Investment
Many years ago, the humorist Will Rogers said that real estate is the best investment in the world because it is the only thing they’re not making anymore. Today, even after a decade of roller-coaster real estate prices, it’s easy to see that Will wasn’t joking. From 1974 to 1994, real estate values in this country increased nearly 15-fold, out-pacing both the stock and bond markets. Real estate, however, has more than a limited supply and TV infomercials going for it. In fact, there at least four reasons why individual investors should consider sinking some cash into real estate once they’ve built a solid portfolio of stocks and bonds:
1. Real estate is an inflation hedge. When overall consumer prices rise, the value of so-called paper investments such as bonds sometimes fails to keep pace. Historically, however, the values of “hard” assets like real estate have kept pace with or outrun inflation. That’s because real estate, as a basic necessity, will always maintain its relative value against other assets as their prices rise.
2. Real estate historically lowers your overall investment risk and raises your returns. Less risk, but bigger returns? Sounds like a mistake, right? It’s not. Earl Osborn at the investment advisory firm Bingham Osborn & Scarborough in San Francisco has done numerous studies showing that real estate actually stabilizes an investment portfolio while increasing returns. For example, an investor who put 80% of his money into stocks and 20% into real estate from 1970 to 1993 would have earned more than 12% a year. Had he stuck solely with stocks, his annualized return would have averaged around 11.5%. What is more important, the portfolio with real estate in the mix actually experienced 6% less volatility. That’s a fancy way of saying that his investments didn’t bounce up and down as much as the stock-only portfolio. It’s worth noting, however, that Osborn defines real estate as shares of real estate investment trusts, a type of stock, which is among the safest ways for individuals to play the real estate game.
3. Real estate generates income. Buildings and apartments can produce significant and reliable cash flow when they are rented out to other people who live or work in them. This is true whether you own the property yourself or invest passively through real estate trusts, mutual funds, or limited partnerships. And reliable income is extremely valuable for investors.
4. Real estate is stable. Forget the recent upheavals in home prices. Over the long run, real estate has proven to be quicker to rise in value than to fall. Barring war or natural disaster, real estate holds its value or rises steadily in price over time. You can’t say that about all investment alternatives.