Real estate is a tricky investment. As a whole, the market is still not very reliable but on the micro level, it can actually provide investors some decent and relatively secure return. More insights from Forbes:
In the ideal world, the perfect investment is one that has a high rate of return year after year coupled with a low risk of losing money. Here in the real world, perfect investments don’t exist.
Investments that generate the highest returns, like stocks, also carry the highest risk that you’ll lose the principle you invest. Those that carry the lowest risk, like government bonds, pay the lowest rates of return.
Year-after-year stellar performance also doesn’t exist. The investments that skyrocket one year can plunge the next. We can all look back and say a single asset type did really well in a single year, as stocks have lately. But, it’s impossible to say with certainty which asset class is going to pay the best returns next year.
In short, there’s no one ideal investment. The key to investing success is to spread your investments over a range of assets. Over long periods of time, a portfolio of mixed investments will typically out-earn an investment in any single asset type.
The most common tactic investors use to create a balanced investment portfolio is to spread their money across three classes of assets:
1. Stocks: Rise and fall in value rapidly, offer high returns coupled with high risk.
2. Bonds: U.S. Treasury bonds, notes and bills are low-risk and low-yield, while corporate bonds and private debt funds offer higher yields at higher risk levels.
3. Real estate: Low-risk, high-return investment when held long-term. Real estate hedges against inflation but has a high entry cost and can’t be sold quickly.
Each of those assets plays a different part in balancing an investment portfolio. Stocks can deliver quick bursts of gains or losses — you can make a bundle or lose it all. Bonds deliver steady income and are prized by older investors who don’t have decades to recoup investment losses, as younger investors do. Real estate can be the most challenging investment and for that reason, it’s sometimes overlooked by investors, even though it’s a useful portfolio diversification tool. Real estate offers a slow, predictable rate of return over the long run and can be a great way to build long-term wealth.
Investors who have the money, expertise and time to deal with property maintenance and tenant selection and the capital to cover acquisition costs will find direct investment in real estate makes a great hedge against inflation that can deliver steady income once the mortgage is paid off. A 20-something who buys a rental property with a 30-year mortgage sets up a nice retirement income stream that starts at age 50.
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