Canopy South Blog

4 Reasons Why Real Estate Is A Good Investment

Posted by Canopy South Capital Management on August 22, 2017 at 7:00 AM

Here are 4 great reasons why we believe real estate is a strong investment in Nashville’s hot market.

Appreciation is Strong

Many assets depreciate with time. Cars, for instance, suffer an enormous drop in value the instant you drive off the lot. Real estate, however, has been appreciating in value at a tremendous rate. The Federal Housing Finance Agency House Price Index indicates that the national average of home prices has been appreciating at 3-5% per year. Median house prices hit an all-time high in May of 2017, and continue to rise. Not only are these gains impressive in and of themselves, they also serve as a robust safeguard against inflation, which we’ll discuss later.

 

 

Real Estate is an Excellent Diversification Opportunity

One of the most common-sense rules in finance is to diversify your personal portfolio. Keeping your eggs in different baskets minimizes your vulnerability to risk. If one basket gets dropped and your eggs shatter, you’ll have other sturdy baskets to keep your financial interests safe.

Investing in real estate is a reliable and impressive way to diversify your portfolio. Worldwide, investors are shifting from bonds and equities (e.g. the stock market) toward real estate because of its combination of profitability and diversification potential. Real estate investments often offer returns that are as good as or better than those of other traditional investments (stocks, bonds, mutual funds, government securities), and can have the added advantages of less risk, lower downsides, and more stability.

According to the founder and CEO of the Real Estate Knowledge Institute, the housing market has a low correlation with the stock market, meaning that if the market goes down, there’s a good chance real estate assets will remain solid. That’s especially useful right now, with an overwhelming number of experts ranging from analysts at CNBC to Market Watch to the Financial Times predicting a market correction.

Lastly, even in a disaster scenario, the “floor” of real estate investments is far better than that of stocks. Stocks can lose enormous portions of their value (or even fall to zero) because their worth isn’t tied to anything material, just general demand for a share in a company. Real estate always has the value of tangible land and structure, meaning that, even in a worst-case scenario, it’s still better than a stock.

It’s a Hedge Against Inflation

As the overall prices of goods and services rise, your dollar becomes worth less and less as it represents increasingly smaller portions of the amount of money needed to purchase goods and services. That’s why cash-based investments like savings accounts, IRAs, and CDs can only get you so far. However, real estate values do not depend on the value of the dollar. In fact, the cost of housing is one of those costs that increase with inflation. That’s another reason why the appreciation of the housing market makes real estate such a solid investment.

The Results are Excellent

Of course, the best reason to invest in real estate is simply that it offers many opportunities for excellent cash-on-cash returns (calculated by dividing an investment’s annual returns by how much was invested). Not only are these results competitive with those of the stock market, they often match them with far less risk.

Between 2000 and 2010, stocks had an average gain of 3.6 percent annually. However, that came with massive fluctuations, with annual gains bouncing from years with -37% returns to 28.7% returns. Compare that with the real estate market, which boasted an average return of 8.4% per year over the same time period. Thus, real estate had over double the rate of return of the stock market, even including the years of the housing collapse.

The real estate market has largely bounced back from the recession, and is going strong across both commercial and residential sectors. Today, it offers the unmatched combination of profitability and stability that serious investors are looking for. Whether you’re ready to become a real estate investors or you still have lingering questions, give Canopy South a call. We’d love to speak with you about diversifying your portfolio with real estate.

Topics: Nashville real estate

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