There are dozens of reasons why you should invest in real estate. Investors can enjoy predictable cash flow, excellent returns, tax advantages, and diversification with well-chosen assets—and it is possible to leverage real estate to build wealth.
Interested but still unsure if it’s the best option for you? Don’t worry. In this article, we’ll be listing down 9 reasons why you should invest in real estate.
1. Increase In Cash Flow
On top of our list is the ability to increase your cash flow. An excellent way to define cash flow from a real estate investment is like the love child of rental income and expense. In other words, it’s the money that’s left over after paying the bills and replenishing the emergency fund and other sources of revenue.
The capacity to produce cash flow is a significant advantage of real estate investing. As you continue to make principal payments on your mortgage and accumulate equity, your cash flow will likely improve.
2. Reduced Taxes And Deductions
Real estate investors can take advantage of a wide range of tax benefits and deductions that can help them save funds when it comes time to file their taxes. The reasonable cost of purchasing, operating, and maintaining a property are often deductible. Examples of this would be expenses related to maintaining and repairing your home and the cost of advertising it to potential renters. It also includes fees you pay for property management and insurance.
Investment properties can be depreciated over 27.5 years or 39 years, depending on the property type, allowing you to take advantage of decades of deductions that lower your taxable income.
For example, if you sell your home for more than you originally paid for it, you won’t be taxed on the profit. The money will instead be taxed as capital gains to avoid double taxation. Even if you don’t invest in an opportunity zone, you’ll pay less in capital gains if you do so.
3. REITs
Investors who want to make a real estate investment but aren’t ready to take on property ownership and management responsibilities should look into real estate investment trusts (REITs).
For investors, REITs offer the advantages of real estate investment, as well as those of publicly traded stock, in one package. Since the beginning, real estate investment trusts (REITs) have provided investors with a steady stream of dividend income, competitive market performance, transparency, liquidity, inflation protection, and a diversified pool of assets.
With the help of professionals like property managers and fund managers, REITs allow investors to take advantage of business opportunities in the real estate industry.
4. Inflation Hedge
An inflation hedge is a way for investors to protect themselves from a decrease in the purchasing power of their money due to rising prices. For inflation hedging, the best investments are those that either maintain their value or increase in value over time.
Real estate’s ability to hedge against inflation is a result of the positive correlation between GDP growth and the demand for real estate. Tenants’ rents go up as demand for real estate grows. This, in turn, leads to a rise in the value of the company’s capital values.
To keep capital’s purchasing power intact, real estate passes some inflationary pressure on tenants and incorporates some of the inflationary pressure into capital appreciation, thus preserving capital’s purchasing power.
5. Appreciation
Real estate investors generate income from rent, profits from property-dependent business activity, and appreciation.
The term “appreciation” in real estate refers to the increase in value of a property over time. On a larger scale, appreciation may result from rising prices, increased career opportunities in your market, and overall growth in your town. Home renovations can also raise the value of a property.
Real estate values tend to rise over time, and with a sound investment, you can profit when it’s time to sell. Rents also tend to increase over time, resulting in increased cash flow.
6. Competitive Risk-Adjusted Returns
Based on characteristics such as location, asset type, and management, real estate returns might differ. Even so, beating the S&P 500’s average return—what many refer to as “the market”—remains a common goal for investors.
7. Increase In Equity And Financial Stability
By reducing your mortgage, you’re accumulating equity, which you may then use to increase your overall net worth. Building equity also provides the opportunity to purchase additional properties, increasing your cash flow and wealth even further.
Long-term financial security is one of the many advantages of real estate investment. You reap the benefits of your investment for an extended period when you have a constant cash flow. Investors can feel secure in their investments because the value of a rental property increases with time. Because land and buildings are appreciating assets, your property’s value is expected to rise.
8. Leverage In Real Estate
An investment’s prospective return is increased by employing various financial instruments or borrowed funds (e.g., debt). Leverage is, for example, paying 20% of the purchase price of a property and getting 100% of the equity in the home as a result. Finance is readily available since real estate is a tangible asset that can be collateralized.
9. Portfolio Diversification
Investment in real estate provides flexibility, which is a further advantage. Other main asset types have a poor or negative connection with real estate. To put it another way, adding real estate to a well-diversified portfolio can reduce volatility and increase returns per unit of risk.
True diversification of a portfolio for an investor occurs when the assets in the portfolio are not linked to one another. Taking a risk-adjusted exposure to stocks and bonds is the simplest way to accomplish this. As the surpluses grow, you may want to add gold and other commodities to your asset allocation.
According to recent studies, your asset allocation has a much more significant impact on your returns than your stock selection or market timing, influencing about 91.5% of your total returns. Rising inflation anticipation is a good moment to invest in gold and other hard assets like real estate.
Key Takeaway
Investing in real estate has a number of advantages, but there are also downsides. Lack of liquidity is a major issue (or the relative difficulty in converting an asset into cash and cash into an asset). It can take months to close a real estate deal, as opposed to minutes or seconds in the world of stock or bond trading. Even with the help of a broker, finding a suitable counterparty can take weeks of labor.
As a distinct asset class, however, real estate can be a valuable addition to a portfolio’s risk and return profile. Real estate provides cash flow, tax deductions, equity building, competitive risk-adjusted returns, and a hedge against inflation as a stand-alone investment.. You can minimize your portfolio’s volatility by investing in physical properties or REITs through diversification.
