What are the Benefits of Investing in Real Estate?
Investing your hard-earned money can be an excellent way to improve your financial situation, especially if you’re planning for your future retirement. There are many ways to invest, such as in the stock market. However, another option is real estate. Investing in real estate gives you a physical asset that you will own and can potentially result in a significant profit if you do it right. But perform your due diligence before you begin pouring your money into real estate and learn about its pros and cons. We’ll present the details of the benefits of investing in real estate for you.
Consider these major benefits of investing in real estate to help you make your decision.
Competitive Risk-Adjusted Returns
Compared to equities and bonds, real estate is much less volatile. It’s also worth noting that the National Council of Real Estate Investment Fiduciaries (NCREIF) revealed in 2018 that commercial real estate returned an average of 9.85 percent over the last few years. This means that real estate investments can provide highly competitive risk-adjusted returns.
Attractive and Stable Income Return
Studies have shown that roughly 80 percent of the total return on U.S. real estate from 1977 to 2007 came from income flows. Investments that rely more on income return are generally less volatile than investments that rely on capital value return, which is why rental properties are considered such an attractive investment. A rental property can provide you with a stable income return over the long-term.
Generate Passive Income
Investing in rental property can allow you to earn mostly passive income in the form of rent. As long as the property is occupied by a tenant, you’ll receive rental payments that you can depend on every month. While a portion of those payments may go to bills or towards paying off the loan you used on the property, the rest is essentially profit and can be used for whatever you want or need.
High Tangible Asset Value
When investing in stocks and bonds, your investment will be highly dependent on the abilities and integrity of managers and debtors. Real estate is a physical asset, which means that they are not nearly as reliant on managers and debtors, reducing the principal-agent conflict. Even if you decide to invest in a real estate investment trust (listed real estate securities), these are still protected by substantial regulations, some of which require a minimum percentage of profits to be paid out to investors as dividends.
Leveraging of Funds
Other types of investments, such as stocks, require you to invest 100 percent of your investment up front. This is not so with real estate. You can take out a loan and make a 20 percent down payment and still own the property 100 percent. This is known as leveraging money. This is hugely beneficial for numerous reasons. First, if you invest in a rental property, you can use the rental income to pay off the loan every month. It also means you can invest in more than one property at a time since you won’t have all of your funds tied up in a single piece of a real estate.
Building Equity and Wealth
As you pay off a loan on a property, you increase the equity you have in that property. This means that you’re building equity over time, which helps improve your wealth. The more equity you have, the more you can borrow against that equity. The ability to borrow against the equity you have can allow you to obtain funds for further investing, whether by renovating the property and increasing its value, or by investing in another property.
If you want to diversify your investments, real estate is an excellent option because it has low (and in some cases even negative) correlation with other major asset classes. By adding real estate investments to your portfolio, you’ll lower its overall volatility while also providing a higher return per unit of risk.
One reason why you should invest your money is to hedge against inflation. If you’re simply putting money away into a savings account, it means that its value is diminishing over time due to inflation. Inflation is the process where prices increase because the value of money decreases. For example, a loaf of bread may cost you $3 to $5 today, but it may cost $10 ten years from now.
If you invest in a rental property, you can actually benefit from inflation. This is because property values and rent will increase as part of inflation. This means you can earn more and more rental income as the years go by. If you’ve got a fixed-rate mortgage on your rental property, your profits will continue to increase as a result.
You’ll pay less in taxes on a real estate investment than you would on a personal business. This is because the government is very friendly towards rental property owners. Any cash flow that you receive through your rental properties will not be subject to self-employment tax. The tax rates on long-term real estate profits are relatively low as well. Additionally, you can write off things like mortgage insurance, maintenance repairs, legal fees, property taxes, travel expenses, and even the depreciation of your rental property.
One of the best tax benefits available to real estate investors is the depreciation deduction. Real estate investors must spread out the cost of their real estate purchases over 27.5 years, which, in turn, creates a yearly depreciation expense. You can write off the depreciation of the building on your rental property as well as any structures (such as a rental office or maintenance shed), just not the land itself. The depreciation deduction is essentially a tax shelter of sorts that allows you to reduce the taxes you owe on your rental properties. However, if you sell a rental property, you’ll have to recapture the depreciation and pay taxes on it.
Take Advantage of the IRC Code, Section 1031
This tax code is also known as the 1031 exchange (or the Starker exchange or the like-kind exchange). It’s a tax-deferment strategy used by many real estate investors. Usually, you pay capital gains taxes on any real estate that you sell. Using the 1031 exchange, you can defer paying these taxes on an investment property when you sell it–as long as you purchase another investment property using the profit of the real estate you sold. The 1031 exchange code lets you move real estate investments without having to worry about being hit with capital gains taxes.
Property usually appreciates in value over the long term. This means that as you pay down your home loan, the value of the home should increase. While the property values may only increase incrementally (if at all) on a year-by-year basis, they should increase more significantly over longer periods (such as 15 to 30 years–or the length of your loan). It’s worth noting that some properties may depreciate in value within the short term based on where they’re located (if you buy a house in a rundown neighborhood full of foreclosures, you should expect its value to dip over the next few years), they’ll generally appreciate in value over the long-term. This is one reason why real estate investing is often considered a great long-term investment.
Offers Long-Term Financial Security
Because real estate is a physical asset that tends to appreciate in value over time, real estate investments can offer long-term financial security in a number of different ways. For example, a rental property can provide you with additional and stable income for years. Additionally, the more equity you have in a property, the more you can borrow against it and the bigger a profit you can make if you sell it.
There are so many different ways that you can invest in real estate. You can buy fixer-uppers and renovate them, flipping them back onto the market for a short-term profit. You can buy rental properties for steady long-term income. You can invest in real estate investment trusts for a more passive approach. And there’s no limit on the number of properties you can invest in. This kind of investment flexibility makes it easy to plan around your specific financial goals, your available funds, and your schedule.
When you invest in stocks, your potential returns are completely dependent on the company’s performance. It’s why playing the stock market is often such a roll of the dice. With real estate investing, the returns you earn are mostly dependent on you and the effort you put into it.
Benefits to the Community
The benefits of real estate investing aren’t just financial. You’re actually doing something with your money that can be of great service to your community. For example:
Provide Homes for Others
People need homes to live in. By investing in real estate, you’re investing in a service that people in the community need. There’s something fulfilling about knowing your rental property is providing someone or a family with a comfortable, safe place to live in which they will build their lives and create meaningful memories.
Contribute to the Local Economy
Besides giving people in the community a place to live, you’re also contributing to the local economy. This is because real estate investors often need to hire local licensed contractors for repairs, maintenance, and renovations. You may also need to purchase materials from local suppliers.
Is it Completely Risk-Free?
As you can see, real estate investing carries a significant number of benefits. However, don’t be fooled into thinking it’s completely risk-free; after all, no investment is completely free of risk. For example, if you buy a rental property, you still have to find tenants. If you can’t find a tenant, then you’re losing money. If you buy a fixer-upper and you realize that more work needs to be done on it than previously thought, you could end up losing money when you flip it. There are risks to all real estate investments, which is why you need to do your research and consider the pros and cons of each individual investment before making a decision.
More and More Investors are Looking into Real Estate Investing
Although there are some risks involved, one thing is for sure — real estate investments tend to be much less volatile than other types of investments, such as stocks. More and more investors are looking into real estate as a flexible way to not only earn additional cash flow, whether over the short-term or over the long-term, but as an effective way to diversify their portfolio and reduce its overall risk.
The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation.
* For loan examples and more information visit our disclosure page at https://www.uslendingcompany.com/disclosures/