Real Estate

Real estate refers to tangible property with land, buildings, natural resources, and the associated rights and interests. Investment in real estate involves purchasing, renting, and managing properties to generate income. There are several types of real estate investments.

Residential real estate (RRE) includes single-family homes, cooperatives, multifamily houses, and condos. Residential real estate investments carry minimal risk and provide predictable passive income. According to Bankrate, RRE generates 10.6% in annual ROI. Many private investors for real estate purchase properties for predictable rental income, as an average landlord makes $87,280 a year ($42 per hour). It is 50% higher than the national average. Residential investments will be profitable in 2024 for the following reasons:

Commercial real estate (CRE) includes income-generating business properties. CRE is slightly less profitable than residential properties, generating 9.5% annual ROI (Bankrate). Both institutional and retail investors purchase the following types of business properties for income-generating purposes:

Some investors buy raw land for long-term value appreciation. There is growing land scarcity around the world, driven by population growth, regulations, and urbanization, the World Bank says. It creates favorable opportunities for investors owning the following land properties:

A real estate investment trust (REIT) is a public company that operates income-generating real estate. Real estate investment companies distribute at least 90% of their income to shareholders as dividends. On average, Real estate stocks generate 11.8% in annual ROI (Bankrate). Investors differentiate several REIT types:

Real estate generates predictable cash flows due to the following factors:

Real estate investors enjoy significant tax benefits from income-generating properties, including but not limited to the following:

Just like gold, real estate appreciates over time. In 1980, you could have bought a home for $47,200. In 2019, the median home price was $297,000. In 2022, it was $431,000. As of 2024, an average home costs $389,000. It’s an 811% increase in 44 years and a 30% increase in 5 years. 

Meanwhile, the cumulative inflation rate for the same period is 272.6%. As a result, home prices outpace inflation 2.9 times, preserving and multiplying wealth for house investors. It gives the potential to build generational wealth valued in millions and even billions of dollars. Thus, Forbes 400 enumerates 25 real estate billionaires with a $138.8 billion combined net worth.

The real estate market responds to economic changes quickly and may involve the following risks for investors:

The real estate market has experienced several transformations, with many businesses filing bankruptcy and many investors losing their portfolios. One of the recent market crashes was the COVID-19 pandemic. The commercial property sector, such as offices, shopping malls, hotels, and resorts, suffered substantially during worldwide lockdowns. McKinsey’s report says the share of vacant office spaces increased from 8% in 2019 to 14% in 2022. CRE rents decreased sharply, as much as 19% – 28%.

The CRE market may not return to pre-pandemic levels for years to come since many businesses have already adapted to remote workflows. As much as 70% of real estate executives expect negative returns in the next few years, according to the PwC 2024 real estate outlook. This transformation has brought negative ROI for CRE investors who entered the market before the pandemic.

Real estate properties are prone to natural disasters, environmental conditions, and climate change. As of 2021, one in ten American homes was affected by natural disasters driven by climate change. That translated into $56.92 billion in damage to 15 million properties.

Climate change will exacerbate in the future. Scientists predict the global temperature to be 2.4 degrees higher by 2050 if global emissions decrease. In high-emission scenarios, it will be 5.9 degrees warmer. It may lead to more hurricanes, floods, fires, earthquakes, and volcanic eruptions. 

As a result, climate change may threaten real estate properties in high-risk areas, such as California, Florida, Georgia, Washington, Texas, North Carolina, and Oregon. Also, New York, San Francisco, and Phoenix will be areas the most affected by climate change in the future. Therefore, investors should consider environmental conditions and insurance options while choosing physical real estate properties.

Realty Income Corp. is an S&P 500 REIT that invests in commercial real estate across the United States, the United Kingdom, Spain, and Italy. Realty Income has over 13,200 properties with short-term and long-term leases under management. Its CRE properties have 98.8% occupancy rates and are diversified across 85 industries.

Realty Income’s portfolio consists of industrial, retail, and agricultural properties mostly unaffected by post-pandemic changes in the real estate market. These properties generate predictable cash flows from over 1,300 clients.

The Realty Income investment provides high exposure to the diversified real estate market and generates monthly dividends (5.36% annually). Additionally, Realty Income increases dividend yield by an average of 4.3% each year (average over 29 years), beating annual inflation.

Equity Residential is an S&P 500 REIT that invests in rental apartment properties in urban areas with high population density. Equity Residential operates 300+ properties with over 78,000 apartments in New York, Washington D.C., San Francisco, Denver, Boston, Southern California, and other highly profitable areas (median rent price in New York stands above $4,000). Equity Residential pays 4.26% annually in dividends. Investing in Equity Residential allows you to capitalize on housing market trends and hedge your wealth against inflation.

Healthpeak Properties is an S&P 500 REIT investing in healthcare properties, including medical labs, continuing care retirement communities, and outpatient healthcare facilities. Healthpeak has over $20 billion in real estate across the United States, with high-quality tenants in well-positioned locations. Healthpeak Properties pays 5.99% in annual dividends. It provides high exposure to one of the most stable real estate sectors.