When consumers consider investing in real estate, they most likely defer to the traditional home purchase. Residential real estate has been a wise investment decision over time, and with interest rates remaining at historically low levels and demand for homes far outweighing available supply, all indications are that the housing market will be strong for some time.
For example, sales of previously owned U.S. homes rose more than expected in March to the fastest pace in a decade, according to the National Association of Realtors. Contract closings increased 4.4 percent to a 5.71 million annual rate while the inventory of available properties dropped 6.6 percent from a year earlier to 1.83 million.
And with such limited supply of quality properties, home-buying competition is fierce with most consumers unable to readily tap the market.
Aside from residential real estate, the multi-housing unit and commercial real estate markets also provide significant opportunities, both in terms of asset appreciation and rental income. Yet, for most retail investors, the money needed to invest in these types of properties may simply be out of reach.
While alternative investment vehicles like crowdfunding have evolved into viable real estate investment options, (Sharestates, for example, offers investors direct access to real estate investments through its online marketplace, with net annualized returns between 8-12 percent), buyers continue to snatch up properties in droves.
And with good reason. Aside from the previously mentioned opportunities for asset appreciation and rental income, investing in real estate has many benefits.
To state the obvious, people need somewhere to live. Rather than pay rent to someone else, homeowners with a traditional mortgage can chip away at loan balances and build equity in their properties over time. And for many, the pride of home ownership is simply part of the American dream.
Better Returns Than Other Asset Classes
While the stock market did enjoy a post-election bounce supported by President Trump’s campaign promises for spurring economic growth, investment experts are signaling there may be a correction soon as the market processes whether the Trump administration can follow through on its pledges. Further, low interest rates continue to keep returns from other asset classes muted – driving investment dollars toward real estate.
A REIT, or Real Estate Investment Trust, is a publicly-traded company that owns or finances income-producing real estate. Modeled after mutual funds, REITs are required to distribute at least 90 percent of their taxable income to shareholders annually in the form of dividends. And over the long term, the total returns of exchange-traded U.S. equity REITs have generally outpaced those of other U.S. stocks. REIT investing is also widely used by investors as a mechanism for diversifying an overall investment portfolio since REITs are not directly correlated to stock market performance.
While the U.S. economy is currently showing only modest signals of inflation pressures, inflation will eventually be an issue to contend with, and real estate is a tried-and-true hedge against these forces.
There are unique tax advantages with holding real estate. Aside from mortgage interest and depreciation deductions, many tax-minimizing strategies can be employed that utilize everything from capital gains and rental income to self-directed IRAs and tax-free property exchanges.
Whether purchasing a home, rental property, commercial real estate or alternative investment vehicle, the real estate market continues to demonstrate strength, and investors looking to grow their portfolios should consider the many available options in this investment category.
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