Posted on Sep.13th, 2013
Real estate continues to be a cornerstone of the savvy investor’s portfolio. It stands the test of time year after year when most other investments suffer from extreme volatility and loss of principal. Here are some of the best reasons why your investment portfolio should contain real estate:
Risk-Adjusted Returns Are Very Competitive
The National Council of Real Estate Investment Fiduciaries (NCR EIF), reports that commercial real estate gave investors an average return of 8.4% during the ten year span of 2000 through 2010.
NCREIF U.S. National Property Index Returns
Source: NCREIF
Tangible Asset Values Are High
A real estate investment is backed by a large amount of physical assets, unlike securities which are paper transactions backed by the faith and credit of the issuer. The tangible asset affect on the investment helps to minimize the principal agent conflict were the best interest of investors is highly dependent on the veracity and competence of fund managers and debtors.
Return on Income (ROI)
One of the most attractive features of real estate is that the major portion of total return is in the form of income. During the 30 years starting from 1977 to 2007, nearly 80% of returns derived from U.S. real estate came from income flows. Stable income further reduces the volatility of real estate investments.
Portfolio Diversification
Investment portfolios that are heavily weighted with equities can benefit by diversifying into real estate. That’s because real estate typically has a low, and sometimes negative, correlation with other asset classes. Therefore, real estate can lower the overall volatility of an investment portfolio while delivering a higher return for the risk.
Inflation Hedge
As the U.S. economy expands rental property rates increase due to higher demands for real estate. This then equates to a higher capital values which has effect of maintaining the purchasing power of invested capital by passing a portion of real estate inflation on to tenants and by the realization of capital appreciation.
Summation
As an asset class, real estate is one of the simplest to understand and can easily improve the risk/reward ratio of the typical investor’s portfolio that’s made up primarily of securities. As a standalone investment, real estate can deliver competitive returns with less risk, fewer principal–agent conflicts, and highly attractive income flows.