Five Reasons Real Estate is a Smart Investment
LAHORE: Ensuring financial freedom is a goal for most people. Investing your pension in only one highly specialised fund could be too risky. Inflation is a concern in many emerging markets, with cash investments gradually losing their value. Is there an alternative investment option?
Investing in revenue streams that earn you a positive cash flow is key; learning to handle inflation and balancing your portfolio is crucial and this can be achieved by combining a diverse set of assets.
Many investors over the past five years have been badly bitten , by even the most solidly performing shares; these investors are looking to income producing real estate as an alternative.
Tax free cash flow
One of the main benefits of income producing real estate is tax free cash flows, this is because of depreciation and mortgage interest deductions (if you leverage your capital). The investor can wait for capital gains on the sale of the property in the future, without ever paying taxes on the cash flow.
Increased tax deduction strategies
Depending on your tax status your rental property will not only provide tax free cash flow, but can be used as a tax deduction against other sources of income .Before investing it is recommended that you consult a tax professional.
Another advantage of investing in real estate is the opportunity to spread your risk. Real estate has a low or negative correlation with other major asset classes.This means that having real estate in your portfolio can reduce volatility and provide a higher return per unit of risk.
Owning a property can give an investor a sense of security as the value does not fluctuate as much as in other asset classes. This does not mean that the investor will break even or earn a profit but it can give peace of mind. Although housing prices do not change much in the short term they may increase or decrease in value in the medium to long term. It is important to perform extensive research in an area before purchasing, observing the historical trends.
Countries in the developing world are struggling to keep inflation under control. Consumer prices in Pakistan increased by 4.02 percent yearonyear in February 2016. Higher prices of food and housing continue to push inflation upwards. Real estate investments have historically shown the highest correlation to inflation in comparison with other asset classes, such as the stock market, treasury bonds, and corporate bonds.
As governments continue to print money in order to stimulate growth, having an incomeproducing real estate asset as a hedge against this inflation is a smart move. In general, when inflation rises, the price of real estate, especially multitenant assets with a high ratio of labour and replacement costs, will rise in tandem.