What is Real Estate and Why Should You Invest?
Before we jump into the why, let's go over some basics involving property differences.
Within real estate, there are property types (asset class), and property classes. These two terms are not the same and shouldn’t be treated as such. A real estate property class refers to the characteristics of a real estate investment and is classified as class A, B, C and D with A being top condition descending to D being the bottom. These classifications were developed by real estate investors, lenders, and brokers to provide a means to communicate and rate the quality (or condition) of the property quickly.
The real estate asset class, on the other hand, is broken down into two main property types: commercial and residential. We will be concentrating on residential property, as this is mainly what V.P.I. focuses on.
Residential Real Estate. Residential property is simply real estate for living. It includes single-family homes, townhouses, condos, and vacation houses. Residential real estate properties are considered an investment if the asset is not owner-occupied, and it is owned for financial gain—either via rent or the appreciation in value, also known as a flip property.
As you may have guessed, there are a variety of property types that fall under the residential real estate property. Here’s a quick breakdown of residential property types within the real estate asset class.
Single-family homes. Designed as a dwelling for one family, this type of property doesn’t share walls with neighboring residences or common areas.
Condominium. Condo units are owned by individuals but have shared access to common areas that are co-owned by all of the residents in the complex. Association fees are applied to maintain, improve, and fix common areas. Examples of shared amenities include a pool (or pools depending on the size of the complex), tennis courts, and package rooms.
Townhouses. A townhouse is another single-family residential property. Townhouses typically share walls with neighboring residences, but unlike condominiums, there isn’t a unit above or below. This type of residential property usually has outdoor space but also has access to neighborhood common areas. From a financing perspective, you can expect mortgage options to be in-line with standalone homes since townhouses are considered single-family residences by most mortgage lenders and banks.
Multi-family properties. Multi-family properties, such as duplexes, are buildings with multiple housing units. Multi-family structures can be anything from apartments to townhouses. However, if the property holds more than four units, it is then classified as a commercial property. From a residential perspective, multi-family properties, although typically more expensive, are often more attractive to banks as they are viewed as less risky since the income generated isn’t coming from a single tenant.
The residential real estate asset class offers a wide range of opportunities. Investors can put money into a variety of locations, property types, and real estate classes to help maximize investment returns.
Interested in residential real estate investing as an alternative asset but not looking to purchase a property on your own? Ventura Property Investments (V.P.I.) provides a seamless experience designed for investors to investing in property and take advantage of real estate opportunities, (both long and short term), while maximizing your investment returns.
Why Invest in Real Estate?
Real estate can enhance the risk-to-return profile of an investor’s portfolio, offering competitive risk adjusted returns. In general, the real estate market is one of low volatility, especially compared to equities and bonds.
Real estate investing is also attractive when compared with more traditional sources of income return. This asset class typically trades at a yield premium and is especially attractive in an environment where Treasury Yields are low.
Another benefit of investing in real estate is its diversification potential. Real estate has a low and, in some cases, negative, correlation with other major asset classes, meaning, when stocks are down, real estate is often up. This means the addition of real estate to a portfolio can lower its volatility and provide a higher return per unit of risk. The more direct the real estate investment, the better the hedge.
Because it is backed by brick and mortar, direct real estate also carries less principal - agent conflict, or the extent to which the interest of the investor is dependent on the integrity and competence of managers.
Inflation Hedging
The inflation hedging capability of real estate stems from the positive relationship between Gross Domestic Product growth and demand for real estate. As economies expand, the demand for real estate drives rents higher, and this, in turn, translates into higher capital values. Therefore, real estate tends to maintain the purchasing power of capital by passing some of the inflationary pressure onto tenants and buyers by incorporating some of the inflationary pressure, in the form of capital appreciation.
The Bottom Line
Real estate is a sound investment and one that has the potential to provide a steady income and build wealth quickly. Real estate has long been considered a sound investment, and for good reason. Before 2007, historical housing data made it seem like prices could continue to climb indefinitely. With few exceptions, the average sale price of homes in the U.S. increased each year between 1963 and 2007—the start of the Great Recession. Home prices did take a small hit at the onset of the COVID-19 pandemic in the Spring of 2020. However, as vaccines were rolled out and pandemic concerns waned, home prices accelerated to reach all-time highs by 2022.
Key Takeaways
- Real estate is considered to be its own asset class and one that should be at least a part of a well-diversified portfolio.
- One of the keyways investors can make money in real estate is to become a Direct Private Money Lender capitalizing on high return of interest rates.
- Flippers buy undervalued real estate, fix it up, and sell it for a profit.
- Direct Private Money Lenders providing funding to Flippers are provided direct real estate exposure without the need to own or operate properties.
- Ventura Property Investments is your Partner in Real-estate Investing providing high interest base returns and equitable percentage profits.