Aside from owning stocks in various sectors, real estate is a popular way to diversify. It can reduce portfolio risk and lower volatility while producing market rate gains. In some cases, it can offer passive income opportunities. Real estate investments do not move with the stock markets, and values tend to fluctuate less dramatically than the average company stock, making it a suitable alternative for many portfolios.
But with the Fed raising rates by 4.25% in 2022 and indications that increases will continue, is it still a good time to pursue real estate? As with all investments, there are benefits and drawbacks. Understanding these can help you decide if it is the right time to start or increase your real estate holdings.
Pros of Real Estate Investing
Diversify your portfolio: Owning property can deepen the diversification of your portfolio because property values do not follow the stock market. Values tend to respond to regional conditions, which could produce above-average returns in some markets even though other regions are in decline.
Lower volatility than market investments: Stocks fluctuate daily, and in a bear market, volatility can be magnified, causing significant declines within a short timeframe. On the other hand, real estate moves in smaller increments and does not tend to have major value shifts from day to day.
Can support both long and short-term goals: Flipping property can produce short-term gains, whereas buy-and-hold strategies support long-term goals.
It can create passive income: Real estate investments require varying amounts of time and expertise. While flipping houses requires an active role, buying single-family homes, condominiums, or commercial property can produce ongoing income through rent. If you are looking for a truly passive opportunity, commercial real estate syndications might be the best choice because the sponsor or syndicate does all the legwork.
Opportunity to Buy at a Discount: Real estate has a submarket for discounted properties. When the economy declines, more houses become available through foreclosures, short sales, or older properties needing repairs or upgrades. These investments allow owners to achieve gains regardless of what happens with interest rates.
Tax benefits: Owning property allows you to deduct the costs of managing and operating your business. Deductions include expenses such as mortgage interest, repairs, marketing, and management company fees. You can also depreciate the asset to lower taxable income. In addition to these ongoing tax benefits, you can re-invest profits into another property through a 1031 exchange, further delaying capital gains taxation.
Cons of Real Estate Investing
High capital requirements: Lenders mandate down payments of up to 20% plus closing costs. A mid-range $400,000 home could require a capital investment of up to $100,000. Real estate syndications combine funds from a pool of investors and could have minimum investments as low as $50,000.
Illiquid asset: Owning property locks up funds until you sell or refinance. Selling also takes time to find a buyer and close the deal. Selling a property often takes months, from the time you list it until the day you close. Real estate syndications tend to have more set hold periods than individual investments.
Real estate can be a lucrative investment even in a down market. For success, it is essential to understand regional trends to buy the right property in the right location. Discounted pricing is another way to mitigate risk.
If you’re interested in learning more about investing in real estate syndications with McKee Capital Group, watch our introductory video.