Real estate has long held its position as a cornerstone of many well-thought-out investment strategies, notes Leapfrog Property Group.
Its stability, potential for value appreciation, income generation through rentals, diversification benefits, ability to hedge against inflation, and opportunities for leveraging capital all contribute to its enduring appeal, it says.
But is it that simple? Well no. There are many factors one needs to consider before making the argument for or against property as a portfolio powerhouse.
Leapfrog Property Group highlights some of the pros below:
Value Growth: A primary reason real estate remains a cornerstone in investment portfolios is its potential for capital appreciation. Over time, property values generally increase due to factors like growing demand, population expansion, and infrastructure development.
Investors benefit from ongoing rental income and the potential for the property's market value to rise, contributing to overall portfolio growth.
Rental Income: Property investments provide a steady income stream through rental yields, making them attractive to income-focused investors. Rental revenue offers consistent cash flow, particularly beneficial during economic downturns when other investments may be volatile. This income can cover property-related expenses, enhancing portfolio stability.
Market Stability: Real estate typically maintains or increases in value over time, providing a stable asset class. Unlike volatile stocks or commodities, properties generally have more predictable value trajectories. As physical assets, real estate instills a sense of security and permanence, appealing to investors seeking stability.
Diversification: Property investments have a distinct risk and return profile, contributing significantly to portfolio diversification. Diversified portfolios are more resilient in market uncertainties, as losses in one area may be offset by gains elsewhere. This balanced approach helps manage risk.
Inflation Hedge: Real estate is often an effective hedge against inflation. Property values tend to increase during times of rising prices, preserving and potentially growing wealth. Rental income may also rise with inflation, maintaining purchasing power.
Leverage Opportunity: Real estate investments allow investors to borrow against their portfolio to invest in additional properties, enhancing potential returns. While leverage carries risks, prudent financing can boost overall investment performance.
Whether your home is considered an asset depends on how you define and analyse assets. In a general sense, an asset is something of value that you own, which can be converted into cash if needed.
From a financial perspective, a home can be classified as an asset or a liability based on the context:
Asset: Your home can be considered an asset if it holds significant value and has the potential to appreciate over time. If you own your home outright or have substantial equity in it, it can contribute to your net worth and financial stability.
Additionally, if you rent out a portion of your home or use it for income-generating purposes, it can generate cash flow, further solidifying its status as an asset.
Liability: On the other hand, your home can be viewed as a liability if it comes with ongoing expenses that outweigh its value or if it's financed through a mortgage that you struggle to afford.
Mortgage payments, property taxes, maintenance costs, and other expenses associated with homeownership can detract from your overall financial health. In this case, your home may not provide a positive return on investment and could be considered a liability.
It's essential to consider both the financial and personal aspects of homeownership when determining whether your home is an asset.
While it may hold significant personal value as a place to live and raise a family, its status as a financial asset depends on various factors, including market conditions, equity, and expenses.
“Purchasing a home is one of the most expensive investments a person can make. It is easy to feel like owning a home is more of an expense than it is an asset. However, homeowners need to take a step back and consider the long-term growth of the property to appreciate that it is, in fact, one of the sturdiest asset classes in which to invest,” said Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett.
According to Goslett, the value of the property will appreciate or depreciate depending on several factors, including things such as the overall state of the market, development in the area, and the demand for property in the area.
The big takeaway here is that markets can fluctuate, and timing is everything when it comes to investing in property. Acquiring property is expensive, there are fees to pay, and they never seem to go away as long as the home remains in your ownership.
But as stated by Leapfrog, physical assets like real estate instils a sense of security and permanence, appealing to investors seeking stability. It's a sense of feeling, which doesn't always bode well in the investment world.
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