Investors often look to the stock market for growing an investment portfolio. With the S&P 500 producing a historical average return of 9% to 10%, there's clear value to investing in stocks, index funds, or mutual funds. But those looking for diversification of their investments may wonder: Is real estate investing worth it?
Real estate can be a valuable investment that can compete with, and often outpace, the returns of the stock market. However, the value real estate can offer isn't without risk or effort. If you're considering becoming a real estate investor, find out whether it's worth it.
Benefits of real estate investing
There isn't one main benefit to investing in real estate, but there are several benefits that, when combined, really make this asset class a worthwhile investment. Similar to stocks, a real estate investment can appreciate, or increase in value, over time while being a source of cash flow from rental income or mortgage income.
However, unlike stocks, a real estate property is a tangible asset that can be leveraged while offering several significant tax benefits, including depreciation and tax deductions, which can reduce capital gains tax.
Real estate investors rarely look at one benefit as the sole reason to invest, but rather one or more of the benefits together. It's not uncommon for investors to achieve double-digit returns (meaning 10% or more) with an investment property, but when other benefits of real estate are factored with it, the return is far greater.
Drawbacks of real estate investing
Real estate investments often require a significant amount of work, particularly if you plan to buy, own, or manage the property as an active investor. There are ways to make it a more passive investment by outsourcing property management or investing in a real estate crowdfunding opportunity or real estate investment trust (REIT) -- but investing in real estate still requires work.
There are also ongoing costs to owning real estate. Properties need to be maintained, improved, and managed properly to maintain the investment. Investors are responsible for paying annual property taxes and insurance. If you own rental property, you also have the added responsibilities of working with and dealing with tenants.
Real estate, as with any other investment class, isn't immune to market fluctuations. Both the stock market and real estate are affected by economic recessions. Decreased demand, oversupply, environmental disasters, and vacancies can all negatively impact the investment's return.
Historically speaking, the S&P 500 has outperformed the Vanguard Real Estate Exchange Traded Fund (ETF) (NYSEARCA: VNQ), a benchmark used to compare REIT performance over the past five years. But over the past 30 years, Vanguard Real Estate ETF has taken the lead.
The Millionacres bottom line
A famous quote made popular by the internet states that 90% of millionaires have been created in real estate. While this statistic has yet to be verified, it's well known that most high-net-worth individuals attribute at least a portion of their investment portfolio to real estate. Investing in real estate can have tremendous value and be a great way to diversify a portfolio.
Whether real estate investing is worth it is ultimately up to you. However, in most cases, the benefits often outweigh the drawbacks and risks. It's really a matter of finding the investment strategy and investment opportunity for your financial goals.