Real estate is one of the most common and rewarding types of investments. More and more individuals are choosing to invest in properties like residential houses, apartment buildings, commercial spaces, and more. But what exactly makes real estate investing such an attractive option? Here are the key reasons to consider real estate as an investment.
Appreciation Potential
Over the long run, real estate has historically proven to increase in value at a higher rate than inflation. As land becomes limited and housing demand increases, property values tend to demanding over time. This means your initial investment stands to grow significantly with each passing year. Even if you’re not actively earning income from the property, its increasing value provides returns just by owning it. Real estate lets investors to gain profit from the steady rise in property values in their local market.
Hedge Against Inflation
Inflation can erode the purchasing power of cash over the years. But real estate provides an inflation hedge since property values generally go up along with inflation. Rents from investment properties can also increase along with inflation to maintain equilibrium. This helps offset any erosion in the value of dollars. Real estate investing thus helps maintain the real value of wealth for the long run.
Cash Flow Through Rents
Once a property is purchased, it can generate monthly rental income through tenants. Positive cash flow occurs when the rental income from a property exceeds costs like mortgage payments, taxes, insurance, maintenance, and repairs. This provides a consistent stream of payments to the investor. Cash flow can be used to pay living expenses, fund other investments, or be reinvested back into more real estate assets. Rental income adds stability and opportunity to a portfolio.
Tax Benefits
Real estate investments provide valuable tax deductions and credits. As a landlord, costs like property taxes, interest on mortgages, insurance, repairs, and depreciation are tax deductible. This lowers the tax liability for rental income received. Depreciation permits taking annual deductions to account for wearing down or using up building components like the roof over 27.5 years. Tax credits are also available for undertaking energy-efficient upgrades. These tax benefits make real estate investing more lucrative.
Forced Savings
By putting money towards a down payment on an income property, investors are forced to save and build equity in an illiquid asset. Unlike money sitting in a savings account, it cannot easily be withdrawn and spent on discretionary things. This forces discipline and long-term focus. The equity built in the property over time through mortgage payments and rising values provides a growing net worth.
Leveraged Returns
With a typical 20% down payment, investors gain exposure to the entire property value but only put up a fraction of the total capital required. This leveraging amplifies returns. If a $100,000 property appreciates 10% to $110,000, the investor earns a 50% return on their initial $20,000 down payment. Leverage multiplies profits if the investment performs well but also increases risk if values decline. Used intelligently, it supercharges real estate returns.
Research Property Before Investing
While the above factors highlight the attractiveness of real estate, it remains an active investment requiring due diligence. The most important metrics for real estate investing include analyzing a property or area’s rental income potential, projected appreciation rate based on supply-demand trends, capitalization rate showing cash flow relative to value, and overall tenant demand vitality. Understanding comparable properties, growth drivers, and downside risk factors is pivotal for success. Researching property finances, rent rolls, tax records, and market conditions can reveal troublesome issues or amazing opportunities. Taking the time to properly evaluate property specifics helps maximize returns while avoiding pitfalls.
Portfolio Diversification
Real estate offers valuable diversification for investment portfolios weighted heavily towards stocks and bonds. It has a low correlation with traditional markets and performs differently during periods of economic volatility. Real estate values are impacted more by local supply-demand factors than national or global market developments. This makes real estate an effective way to balance out risk across different asset classes and hedge against downturns elsewhere.