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Six Reasons To Invest In Rental Property

Homes Of Distinction’s co-founder Jonathan Broekman discusses six reasons why investing in income-producing property is an excellent choice for protecting and growing your wealth:

1. Positive cash flow
One of the biggest benefits to income producing real estate investments is that leases generally secure the assets. This provides a regular income stream that is significantly higher than the typical stock dividend yields.

2. Leverage to multiply asset value
Another important characteristic of commercial real estate investing is the ability to place debt on the asset, which is several times the original equity. “This allows you to buy more assets with less money and significantly multiply asset value and increase equity as the loans are paid down,” says Jonathan.

3. Low-cost debt leveraged to expand cash flow
Placing “positive leverage” on an asset allows for investors to effectively increase positive cash flow from operations by borrowing money at a lower cost than the property pays out. For example, if a property generating a 6 percent cash-on-cash return were to have debt placed on it at 4 percent, the investors would be paid 6 percent on the equity portion and approximately 2 percent on the money borrowed, thereby leveraging debt.

4. Hedge on inflation
Jonathan explains that for each rand that is created, there is a corresponding liability. Property investments have historically shown the highest correlation to inflation when compared to any other asset class.
As countries around the world continue to print money to spur economic growth, it is important to recognize the benefits of owning income producing real estate as a “hedge” against inflation. Generally speaking, when inflation occurs the price of property will also rise.

5. Capitalise on the physical assets
Rentable property is one of the few investment classes that has meaningful value. The property’s land has value, as well as the structure itself, and the income it will produce holds value to potential investors. Income-producing property investments do not have “red” and “green” days like the stock market.

6. Asset value appreciation
Over time, more and more inflation has made it into the economy which drastically reduces purchasing power. But Jonathan points out that “income-producing property investments have historically provided excellent value appreciation that meets (and even exceeds) other investment types. Properties historically increase in value, as the income of the property stands to improve through rent increases and increased effective management and potential of the asset.”