The ability of real estate to hedge against inflation stems from the positive relationship between GDP growth and demand for real estate. Rents rise as economies expand and demand for real estate rises. This, in turn, translates into higher capital values. As a result, real estate tends to maintain capital purchasing power by passing some of the inflationary pressure on to tenants and incorporating some of the inflationary pressure in the form of capital appreciation.Another advantage of investing in real estate is the potential for diversification. The correlation between real estate and other major asset classes is low, and in some cases negative. This means that adding real estate to a diversified asset portfolio can reduce portfolio volatility and provide a higher return per unit of risk. Leverage is the use of various financial instruments or borrowed capital (e.g., debt) to increase the potential return on an investment. For example, a 20% down payment on a mortgage gets you 100% of the house you want to buy—leverage. That financing is readily available because real estate is a tangible asset that can be used as collateral. Real estate returns vary according to location, asset class, and management.
Why real estate is profitable?
Real estate investors profit from rental income, profits from property-dependent business activity, and appreciation. Real estate values rise over time, and with a good investment, you can profit when it comes time to sell. Rents tend to rise over time, which can result in increased cash flow. As you pay down a mortgage, you accumulate equity—an asset that contributes to your net worth. And as your equity grows, you’ll have more leverage to buy more properties, increasing your cash flow and wealth even more.The net income from a real estate investment after mortgage payments and operating expenses is referred to as cash flow. The ability to generate cash flow is a significant advantage of real estate investing. In many cases, cash flow only improves over time as you pay down your mortgage and accumulate equity.
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