Generally, when we think about real estate, we focus on family homes or primary residences. However, real estate is one of the popular ways to invest. But why invest in real estate? With a portfolio of good assets, investors can benefit from predictable cash flow, great returns, tax breaks, diversification, and wealth creation. So if you’re ready to jump into the world of real estate investing, let’s consider why real estate investment might be a good idea for you.
Benefit 1: Real Estate Gives You Increased Cash Flow
When we talk about cash flow, we are referring to the net income that arises from a real estate investment. This cash flow is calculated as the rental income minus the mortgage expenses and operating expenses (like landscaping and repairs).
A major benefit of real estate investing is to create cash flow. As you continue to pay down the mortgage on the property, your payments become smaller while the rental income increases over time. Therefore, the cash flow on a property will steadily increase (while you also build your equity in the property).
Benefit 2: Real Estate Investment Generates Tax Advantages
Another reason to invest in real estate is to leverage several tax breaks and deductions to save on costs and increase your profits. You are allowed to deduct the reasonable costs of owning and managing a property.
Specifically, you can get tax deductions on mortgage interest, cash flow from investment properties, operating expenses, property taxes, insurance, and depreciation, among other benefits. The end of each fiscal year is always busy for real estate investors as they seek to take advantage of all the tax breaks and deductions that abound.
Benefit 3: Real Estate Attracts a Lower Tax Rate
You should invest in real estate for the tax advantages. If you sell your investment property after a year, the proceeds are subject to capital gains tax rates which range between 15% and 20% (depending on your tax bracket). These rates are usually less than your income tax bracket rate.
You can also benefit from another tax advantage called the 1031 exchange. This allows you to swap properties that are held for business or investment purposes. So if you sell one property and immediately buy another one that is seen as similar by the IRS, then you can defer paying the capital gains taxes on the sale. The best news? As long as you use them correctly, there’s no limit on how many times or how frequently you can do 1031 exchanges!
Benefit 4: Real Estate is Depreciable
The longer you hold the property, the more you can benefit. Depreciation is a non-cash expense that reduces the value of your property for tax purposes. Residential properties can be depreciated over 27.5 years and commercial properties can be depreciated over 39 years. Since the cost of buying and improving an investment property can be depreciated over its useful life, you can benefit from years of tax deductions that lower your taxable income.
You should note that this depreciation doesn’t affect the market value of your property. In reality, real estate tends to always appreciate. But depreciation allows you to generate positive cash flow while reporting a lower income for tax purposes. This leads to you keeping more of your income for even more real estate investments.
Benefit 5: Real Estate Appreciates
Real estate investors make money from real estate via rental income, any profits created by property-dependent business activities, and appreciation. Appreciation is the increase in the market value of your property over time. Therefore, with a business-savvy real estate investment, you can realize a good profit when it’s time to sell. Furthermore, rents tend to increase with time, so this will lead to higher cash flow.
Benefit 6: Real Estate is Improvable
Since real estate is a tangible asset (made of brick, concrete, wood, and glass), you can improve its value over time. While you can’t control natural disasters or demographic and economic changes, you can control your physical property and tenant occupancy. Whether you choose to do structural or cosmetic repairs, DIY, or hire someone to do the repairs, you are improving your property. And this will increase the value of your asset base.
Benefit 7: Real Estate Allows You to Build Equity and Wealth
Even if you purchase your investment property with a mortgage, you can still build equity and wealth. Every time you make a mortgage payment, a part of it goes to paying interest on the loan and the other part pays down the principal amount you borrowed to buy the property. So with each mortgage payment, you own more and more of the property. This allows you to build equity – an asset that’s a part of your net worth. As you build equity, you have greater leverage to buy more properties and further increase your cash flow and wealth.
If you own rental properties, the rental income should be able to make the mortgage payments, and also cover any repairs and maintenance costs. At the end of your mortgage period, you will own the entire property, and your tenants would have paid for most if not all of the mortgage.
Benefit 8: Real Estate Diversifies Your Portfolio
Real estate investment is a good way to diversify your portfolio as they have a low (and sometimes negative) correlation with other primary asset classes. So adding real estate to your investment portfolio means greater diversification, which lowers volatility and provides a higher return vis-a-vis risks of investing. Therefore, real estate serves as a safe and tangible asset that lowers your portfolio risk. Furthermore, many people have become wealthy by investing only in real estate.
Benefit 9: Real Estate Leverage
What is leveraging? Leveraging means using borrowed money (or borrowed capital) to increase the potential returns from an investment. In the case of real estate, you use leverage by taking out a mortgage to buy a property while only putting down a fraction of the cost (or your deposit).
But although you only paid a small portion of the purchase price, you still get access to all of the benefits. You need to keep up with the mortgage payments, which should not be a problem as you would receive income from the property. You get to keep the income generated from the property, all of the equity that you accumulate, all of the property appreciation, and you enjoy the tax deductions.
Benefit 10: Real Estate Enjoys Competitive Risk-Adjusted Returns
While real estate is a low-risk investment, the returns still vary. Real estate returns fluctuate depending on several factors, such as location, asset class, and property management. However, real estate investors seek to get returns that exceed the average S&P 500 average returns or the market rate. For the past 50 years, this average annual return has been about 11%.
Benefit 11: Real Estate Provides an Inflation Hedge
Real estate demand and GDP growth are positively correlated, so this makes the former a great way to protect yourself against inflation. As an economy grows, the demand for real estate drives rents higher, and that means higher capital values. Therefore, real estate investment tends to maintain your buying power as you pass some of the effects of inflation onto tenants. However, for that to happen, you need to make rent adjustments to keep in line with inflation. Furthermore, some of these inflationary pressures are counteracted by the steady capital appreciation that your property is enjoying.
Benefit 12: Variations in Real Estate Investment
Do you want to invest in real estate but minus the responsibilities of ownership and property management? It’s possible! You can place funds in a real estate investment trust (REIT). A REIT is a company that owns, operates, or finances a portfolio of income-generating real estate properties. Many of these REITs are publicly traded and under high volume, which allows you to easily buy and sell their stocks. REITs are mandated to pay 90% of income to investors, so they tend to offer higher dividends than many stocks.
Benefit 13: Real Estate Investment Coincides With Retirement
When you purchase real estate, your cash flow is lower and the principal reduction on your mortgage is less. As your mortgage is reduced over time, your cash flow steadily increases. Owning real estate allows you to save for retirement in a vehicle that acts as a hedge against inflation and gives you greater cash flow.
Benefit 14: Real Estate is Relatively Straightforward
Finally, real estate investment is quite easy to understand. Furthermore, it’s easy to acquire real estate as financing is widely available. It’s also fairly easy for most investors to improve their properties and enjoy the many benefits. The returns are relatively risk-free and your investment property will continue to appreciate with the passing years.
Get a Real Estate Pro to Help You Invest!
Why invest in real estate? Why wouldn’t you do so? We have shared several great reasons why you should consider going into real estate investment. Are you thinking about investing in the Bloomington-Normal area of Illinois? Need an excellent real estate agent to help you purchase suitable properties? Then contact me, Becky Bauer, an expert realtor who has helped many valuable clients achieve their real estate goals. I’ll be happy to apply my expertise to help you with your real estate investment journey. Contact me today so that we can begin working together toward your goals.