Real Estate as an Asset Class
Understanding Real Estate as an Asset Class
Only buy something that you’d be
perfectly happy to hold if the market shut down for 10 years.” Warren Buffett,
Real Estate or Property investment is an alternative investment which offer exposure to investment opportunities not generally available through traditional asset class. It offers an investor mitigates the risk & the market volatility on their portfolio apart from providing attractive returns. This type of asset class (rather than a primary residence) generates regular income & able to meet cash flow requirement of an investor apart from capital appreciation.
Apart from investor primary investment ,real estate investor may hold various other properly such as land, commercial , residential properly etc, It provides regular rental income. On a longer period of time, it provides capital appreciation also. Here, we tried to put different investment option in real estate –
|Asset Class||Description||Access to money||Return|
|Physical Property||The property is registered in the investor name.||Rental income & capital appreciation.||Rental income received & increase in the value of asset|
|Listed Property||The rights to the property are held in as investment product such as property loan stocks and property unit trust.||Rental income in the form of interest (dividend), capital appreciation, is pure market driven. Works as equity instrument||Rental income received & increase in value of property|
With this, let’s look at various advantage and disadvantage of real –
- Money invested in real estate provides a regular return on investment as well as the possibility of capital appreciation over a period of time.
- Diversification – Real estate provides diversification to a investment portfolio.. Diversification which you required the most in your portfolio. Real estate gives diversification which is usually non-correlated to any other asset returns. It provides a unique balance in the portfolio. So, portfolio with real estate as an investment generally produce higher risk adjusted return.
- Over a period of time, real estate asset class provides a good hedge against inflation.
- On relative risk adjusted performance , real estate has outperform other alternative asset class over a period of time
- Generally, each country has its unique tax treatment for Real estate portfolio. One can capitalize these opportunities & try to match it with his cash flow.
But one has to understand that –
1) Real Estate investment is longer term commitment. It does not give liquidity option to the investor.
2) Interest Rate cycle (fluctuating interest rate) have a strong role in the return of real estate investment.
Real estate investment is different and certainly provides a higher return over a period of time. However, one has to understand that “real estate”
investment required larger investible corpus. This is basically suites to the High Net worth Investor (HNI).
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