For investors looking to diversify their portfolios and realize stable and substantial gains, there’s a lot to like in single-family rentals. Purchasing an investment property provides the appreciation of real estate plus steady cash flow from tenants. Here are four reasons why purchasing an investment property makes sense.
Greater Asset Stability
Due to increased volatility in the stock market following the economic downturn, real estate investments have generally outperformed the stock market during the last several years. This has lead many investors to consider investing in real estate. For individual investors, purchasing an investment property can be a superior choice to more traditional investments like stocks and bonds.
One big reason? Real estate investments are better insulated from market volatility than stocks and bonds. Returns are more stable, since they come from both rental income and property appreciation.
The most immediate returns on your investment are generated from monthly rental income. Rents can also rise over time if demand for rental property in the local market increases. Long-term returns take the form of home price appreciation on the property once you decide to liquidate the asset and put it on the market.
When thinking about how market downturns can affect the performance of your investment, it’s important to note that “rents tend to be sticky downward” (a phrase often used by our CEO). Even when we see significant fluctuations in home values, rents typically tend to remain flat. That means you can more easily ride out cycles in the market as you continue to collect rent on your investment property.
In any type of investing, diversification is important because it helps spread out risk. Purchasing an investment property is a proven way to add diversification into your holdings, and choosing rental properties across different markets allows you to add an entirely new dimension to your portfolio.
A key attribute of rental property ownership is the cash flow provided. This money goes to you, while stock gains stay tied up in your investments. That cash can be used to supplement income or invest in additional property.
There are numerous tax advantages that come with purchasing an investment property, such as the ability to deduct depreciation, loan interest, and many costs associated with management. Those deductions can be used to offset the cost of potential repairs generated by the property.
Real estate can be a potential hedge against inflation as historically, rental rates and home prices rise with inflation. This may provide an inflation hedge for both your rental income and anticipated appreciation of the property value. Since your mortgage payments will not increase with inflation, it offers a benefit over time.
As the owner of a rental property, most of your costs are fixed. Inflation does not change your mortgage rate. Some costs, like insurance and property tax may increase with inflation, but remember that the value of your property, as well as the rent that you are able to charge will also increase. Average inflation so far this year has been just over 1 percent, while U.S. home prices have risen 5.5 percent.
Investment in rental properties offers a number of significant advantages to both traditional investment assets and alternative real estate investments. As highlighted in this recent post by investment advice website BiggerPockets, it’s becoming more difficult to find a “good deal” through more conventional real estate investment strategies such as “flipping.” Investment properties offer a lot of strategic value to your portfolio, and finding one in distant markets is easier than ever with Roofstock.