Where is your money invested? If you’re like most people, it’s probably in some combination of stocks, bonds, and mutual funds. While these can be great investments, they can also leave individual investors at the mercy of the market: In 2008, many watched helplessly as the S&P 500 lost 40% of its value, destroying in a single year what many had worked their entire careers to save. Moreover, these financial products often lack transparency and rarely allow investors to drive change in their own environment.
By contrast, aside from owning a home, relatively few people invest in real estate—despite the fact that real estate has over time proven to be a strong investment. Plus, investing directly in local real estate has many other significant benefits.
Here are five reasons to be investing in local real estate:
1. No middlemen = transparency
Most real estate funds charge huge fees just to manage your money and often invest via blind pools. At the end of the day, you may know little to nothing about what properties you are actually investing in.
By investing directly in a single property in your own neighborhood—one that you actually know, can see, and visit—you are able to establish a real connection with your investment creating an entirely new kind of transparency.
2. Cash flow + long-term appreciation
Often you will hear financial experts talk about the benefits of an investment opportunity based on its cash flow or its potential for long-term appreciation. Bonds or other fixed-income investments pay fixed current cash flow while stocks often pay little in the way of dividends, but should increase in value.
Commercial real estate as an investment vehicle often provides both benefits in a single asset, producing annual income as well as appreciation over the long-term. A corporate bond today may pay an annual yield of 3-5% over a 10-year period, at the end of which you have your principal returned. Over the same 10-year period you could purchase an investment property leased to that same corporation which could produce an annual yield of 6-8%. Meanwhile, over the same 10-year period, the property may appreciate as well.
3. Diversification with a hard asset
As we have covered in previous posts, real estate is a hard asset. This means that during times of inflation where other cash-flowing investments can typically lose a great deal of value, well-located real estate properties will tend to retain their value to a much better degree.
Smart investors know that diversification is key. Investing in real estate alongside traditional stocks and bonds helps build a well-balanced portfolio.
4. Local knowledge
How much do you really know about what you invest in? If you own Apple stock, is it because you truly understand the underlying fundamentals of operating a technology hardware business? Or the ins and outs of supply chain manufacturing? Most people own Apple stock because they like their products and know that it is a popular and successful company.
Real estate is unique in that it is highly local. What works well in one place may be totally wrong in another. As a resident and customer in your own neighborhood and city, you most likely have a very good understanding of the local real estate market. For example: What stores or services are missing from the area? How much is reasonable to pay for a one-bedroom apartment? What neighborhood is the new up-and-coming place to be?
Although you may not be a professional real estate investor, you are more than likely an expert in your own local real estate market.
5. The double bottom line
For the most part, the investments that you have today are disconnected from the rest of your life. The companies you own stock in are more often than not large corporations whose operations will have little effect on you individually. On the other hand, with local real estate you have the ability to effect real change in your own environment.
If there is no pharmacy near where you live, buying a few shares of stock in ticker symbol WAG (i.e., Walgreens) won’t do much to solve that problem. Or if you would prefer to see a local restaurant open around the corner rather than a national chain, aside from going into the restaurant business yourself, you probably can’t do anything about it.
Investing locally in specific real estate property completely changes that dynamic. You are able to put your dollars into the places that you support, and benefit not only from the returns on that investment but all the additional advantages that come from it.
Imagine being able to earn an 8% return while at the same time helping to redevelop a long-vacant storefront on your corner into a great neighborhood cafe. Does the value of your home increase as well? Are you happier now that you don’t have to walk eight blocks to get a cup of coffee? Does being a customer take on a whole new meaning, knowing that every dollar you and your friends spend is helping to drive the success of your investment?
Director of Product Development
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