What makes real estate investment so important?

Because it offers competitive risk-adjusted returns, real estate can improve the risk-and-return appearance of an investor's portfolio. In contrast to bonds and stocks, the market for property is generally less volatile.

Comparing real estate to more conventional sources for monetary return reveals another allure. This asset class is particularly appealing when Treasury yields are low because it normally invests at a yield preference over US Treasuries.

Protecting and Diversifying

The potential for diversification is another advantage of real estate investing. In other words, when stocks are downward, real estate is typically up. Conversely, real property has a low and occasionally even negative association with other significant asset classes.

Adding property to an investment portfolio can therefore reduce volatility and increase comeback per unit of threat. The hedge performs better with a more direct real estate investment: Publicly traded securities with less direct market exposure, like REITs, will generally mirror the performance of the stock market as a whole.

Direct real estate also has a lower principal-agent conflict—that is, the degree to which the investor's interest is contingent upon the honesty and skill of debtors and managers—because it is supported by physical real estate. Investments, even the more obscure ones, are somewhat protected. For example, REITs require that a minimum of ninety percent of their profits be distributed as dividends.

Hedging against Inflation

The positive correlation between GDP growth and desire for real estate is the reason behind real estate's ability to withstand inflation. Rents rise in response to the need for real estate, which boosts economies and raises capital values. Therefore, by bypassing a portion of the rising costs onto tenants and incorporating a few of the inflationary tensions in the shape of capital appreciation, real estate tends to keep up the monetary value of capital.

Leverage's Power

Leverage is a tool that is unavailable to stock market traders when investing in real estate, except REITs. Leverage is the process of using debt to pay for a bigger purchase than you can afford. A stock purchase requires payment of the entire purchase price at the time the order is placed unless you are purchasing on margin. And even with that, you can still borrow a lot less percentage than you could with real estate because of that magic financing tool called a mortgage.

There is typically a 20% down payment required for conventional mortgages

In certain cases, though, a mortgage with a down payment as low as 5% may be available, depending on the location of the real estate you invest in. By paying a small portion of the entire value, you can gain control over the entirety of the asset and any equity it contains. You own the property as soon as the papers are signed, of course, but the size of your mortgage determines how much ownership you actually have.