Many people consider real estate to be the original alternative investment. Although there are certainly ways to speculate using real estate, for most long-term investors the goal is current income with the possibility of steady appreciation over the life of the holding.
Rents are property specific, which creates a very effective diversifying mechanism. Rental payments aren’t tied to the whims of the stock market. And even though property values can fluctuate in both directions, the rental income being generated on a given property often remains the same regardless of these moves. During the financial crisis a few years ago many landlords continued receiving stable rent amounts despite the fact that underlying property values were moving around to an unusual degree. The yield on their initial investment remained largely intact. Which is a big part of the case for investing in income-producing real estate.
Rental revenue doesn’t come without expenses, and it is important for would-be investors to understand how these expenses impact earnings. Things like taxes, insurance, repairs and maintenance, and property management costs (assuming you hire a professional rental and location manager – which is a good idea for most people) will all offset revenue. Renting property is in many ways akin to a business activity, so it is reasonable and normal to expect to be subject to the takes-money-to-make-money dynamic. Depending on the area and the specifics of the property, 30% to 40% of the revenue each month is often required to cover the various expenses.
But despite these expenses, the net income left can still produce an investment yield which compares very favorably to other investment choices.
Real estate investors also have the possibility of yield enhancement from a variety of sources such as bargain purchases, tax efficiency and the judicious use of leverage (i.e. mortgages against the property). Real estate has probably produced more wealth for families than any other single asset class. It combines income, capital preservation, tax planning, appreciation, and leverage factors in a single investment. So the range of possible benefits is quite broad, and because the market for real estate services is now so well developed in virtually every corner of the country, it is possible (and likely even advisable) to invest in real estate without having to directly handle any of the ownership burden yourself.