Can an Investment Property Buffer a Volatile Stock Market?

Investors faced with a volatile stock market and talk of a pending “correction” may want to consider diversifying their investments through the purchase of a rental property. A recent economic research paper, “The Rate of Return on Everything, 1870-2015,” seems to support this option. The study analyzed the data for investment classes including the stock market, bonds, treasury bills, and real estate. It concluded that while the long-term returns were comparable, residential real estate was less volatile on a national level.

In addition to less volatility, here are some other areas where investing in real estate may benefit your long-term financial strategy.

Monthly Rental Income

Investment properties provide a stable monthly source of cash. This passive income can be used to supplement W-2 or 1099 compensation, achieve early retirement, or complement retirement income. Knowing the amount of income to be received each month allows the investor to not only meet current obligations, but also plan for future expenditures and investments.

In addition to monthly income, an investment property can also provide profits through appreciation when sold.

Aside from cash dividend payouts, income is generally made in the stock market only when shares are sold. The gains of the past year could be wiped out in a day – with no guarantee that they will be regained or that additional losses won’t occur in the future.

Control of the Investment

Unlike stock purchases, buying an investment property offers the owner full control over the property. The owner chooses how to finance the rental property, what improvements could increase its value, and how much rent to charge. They also decide how long to hold the investment and when to sell.

In contrast, there’s very little control over stock investments, except for the selection of the stock and determining when to sell shares. Many factors can affect a stock’s value – interest rates, economic policy, global events, etc. – all outside the influence of investors.

Lower Risks

Generally speaking, investing in rental property can have fewer risks than buying stocks.

If the property is kept as a long-term investment, the risk decreases as equity builds in the property and real estate prices rise in the area.

Also, each additional property investment adds diversification, which can also reduce risk.

Alternatively, diversification won’t eliminate systematic risk when it comes to factors affecting the overall performance of stocks in the financial markets.

Asset-Based Lending

Asset-based lending allows investors to qualify for a loan based on assets, such as properties, rather than personal income. Qualified investors can access financing for properties individually or by leveraging cash flows from a number of properties. Buying additional rental properties in this way can increase rental income.

Like other benefits of investing in property, this isn’t an option when purchasing stock.

Tax Advantages

Owning a rental property can provide a number of tax benefits including 1031 Exchanges, depreciation, and deductions such as property taxes, mortgage interest, operation expenses, and insurance. The amount of these deductions is based on rental income.

Profits from the sale of stock and dividends earned are subject to income tax. Generally, these profits can only be reduced by commissions paid to a broker and certain fees.

Conclusion

If a volatile stock market with dramatic price fluctuations has you concerned, consider investing in an income property. Not only can it add diversity to your investment strategy, but a recent study shows that real estate offers more stability. You may also enjoy added benefits like more control, less risk, and a stable cash source. In addition, real estate investments can be used as leverage to expand a property portfolio and frequently offer a number of distinct tax advantages.

For more information on Axos BankTM and Income Property Lending, where we deliver flexible financing programs in multifamily markets throughout the nation, please contact us by phone at 1-800-656-LOAN today.

Can an Investment Property Buffer the Effects of a Volatile Stock Market?

This blog post was published by Axos Bank on October 29, 2018 and last updated on December 11, 2018.