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Why Real Estate Investing Is a Smart Way To Diversify Your Portfolio

4 minute read

By Katie Ormsby

Real estate investing is a way to generate passive income and build wealth over time. Unlike other types of investments, such as stocks or bonds, real estate provides tangible assets that can appreciate in value and generate income through rent or property appreciation.

In short, investing in real estate can provide stable long-term financial benefits. Let’s explore some of the advantages of real estate investments and take a look at the different ways you can invest in real estate.

Shutterstock: Andy Dean Photography

Less Volatile Than Other Investments

One of the main benefits of real estate investing is that it’s generally less volatile than other types of investments. While the stock market can fluctuate wildly on a day-to-day basis, real estate tends to be a more stable and predictable investment.

That’s because the value of a property is based on a number of factors, including location, market demand, and local economic conditions. While these factors can certainly change over time, they do so more gradually than the ups and downs of the stock market.1

Home Values Increase Over Time

Another advantage of investing in real estate is that home values tend to increase over time. While there may be dips in the market due to economic conditions, over the long-term, real estate values have historically gone up.

As a result, the longer you own the property, the more you can make. Population growth is partly responsible for this trend. By investing in real estate, you can take advantage of this long-term trend and build wealth over time.2

Real Estate Diversifies Your Portfolio

Real estate also offers a way to diversify your investment portfolio. If you’re already investing in stocks or bonds, then adding real estate to your portfolio can help balance out your risk and increase your potential returns.

Real estate investments can also provide a steady stream of passive income, which can supplement your income — perhaps especially useful during retirement. Plus, real estate is a tangible asset to add to your portfolio.

Additionally, diversifying your portfolio even more with a variety of properties can be smart. For instance, consider investing in single-family and multi-family homes, office and retail buildings, and across geographic regions.3

Types of Real Estate Investments

There are a number of ways to invest in real estate, each with its own advantages. Here are a few of the most common types of real estate investments.

Rentals

Buying a rental property is a popular way to invest in real estate. With a rental property, you can generate passive income by renting out the property to tenants. While there are risks involved, such as vacancies, tenant turnover, and property damage, owning a rental property can be a lucrative investment for those who are willing to put in the effort.

Flipping Houses

Flipping houses involves buying a property, making renovations or upgrades, and then selling it for a profit. While this can be a high-risk, high-reward investment, it can also be a way to generate quick profits in a short amount of time. However, flipping houses requires a significant amount of time, effort, and expertise. So, it may not be right for everyone.

REITs and Mutual Funds

Real estate investment trusts (REITs) and mutual funds allow investors to pool their money together to invest in a diversified portfolio of real estate assets. These investments offer a lower level of risk than buying rental properties or flipping houses and are more liquid. REITs and mutual funds can be good choices for those who want to invest in real estate.4

Things To Keep in Mind

In addition to understanding the various types of real estate investments available, it’s crucial to consider the costs associated with investing in real estate. These can include upfront costs like down payments, closing costs, and renovation expenses. There are also ongoing expenses like property taxes, insurance, and maintenance.

It’s also important to consider the time and effort required to be a successful real estate investor. Depending on the type of investment you choose, you may need to dedicate significant time and effort to finding and managing properties, working with tenants or contractors, and monitoring market conditions.

Despite these challenges, investing in real estate can be a highly rewarding and profitable venture for those who are willing to put in the effort and take calculated risks. By diversifying your investment portfolio with real estate, you may be able to create a more stable and lucrative financial future for yourself and your family.

The Bottom Line

Investing in real estate can be a great way to build wealth and generate passive income over time. While there are risks involved, like short-term market fluctuations, there are also a number of benefits. For example, real estate is less volatile than some investments, real estate values increase over time, and real estate diversifies your portfolio.

If you’re considering investing in real estate, then it’s important to do your research, understand the risks and rewards, and choose the type of investments that most suit your financial goals and risk tolerance. Before investing, spend some time looking into your real estate investment options, including rental properties and REITs.

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