Benefits of Investing in Real Estate
Benefits of Investing in Real Estate
The Housing Market Crash in 2007 was the worst crisis that affected the housing sector in the US in 50 years. This caused a financial crisis and recession that nearly drove the country into another Great Depression.
In the aftermath of the recession, the negative sentiment over real estate investment was understandable. Few were inclined to put their hard earned money into property. Americans, in fact, prefer to stash their investment dollars in the stock market.
Many experts today believe that investing in real estate is a good addition to your investment portfolio. Of course, you can never go wrong with traditional tax preferred vehicles like an IRA and 401k.
However, if you are looking for an investment that will make your money earn the most but potentially offer the least risk, real estate investment is a great option. There can be huge benefits in investing in real estate. With millennials leading the pack, many are turning to real estate investment.
Statistical facts show that this is not just an unsupported opinion. From 2000 to 2016, the S&P500 yielded a 5.43% annual total return. Compare that with 10.71% return in real estate and you know that you have a winner on your hands. A recent comparison puts it at 12.65% for S&P and 11.37% for real estate. Still a good percentage, if you ask me.
7 Great Reasons to Invest in Real Estate
The housing crash was an anomaly, but typically, property values appreciate. Further, the IRS allows for write off for property depreciation. Add to this mortgage interest deductions, and potentially your positive cash flow could be tax free.
If you are investing in a rental property, this affords another opportunity for more tax deductions. It is however, important to keep in mind that rental real estate is a business. Any expenses relating to tending to this business can be claimed as business deductions.
In addition, some personal expenses including travel expenses to check on the property, or payments to family members who manage your property can be deductible. This increases tax benefits when it comes to cash flow and the future sale of the property.
And how about capital gains taxes? Capital gains taxes are what the government collects when you sell your real estate property for more than what you bought it for. However, there is the 1031 Tax exchange provision which allows you to to bypass taxation by deferring the financial gain into your next investment.
When the real estate market collapsed in 2007 and 2008, many banks revised their lending standards that made mortgage very difficult to obtain. But there has been a gradual move to more relaxed standards.
This is good news because real estate is one of the few investments where your mortgage from the bank gives you leverage. The potential to make a down payment, leverage your capital, and thus increase your overall return on investment is great.
Adding real estate to a portfolio of diversified assets such as IRA, 401K, stocks and bonds can lower portfolio volatility and potentially, provide a higher return per unit of risk. In plain language, you will have a stronger and more stable investment portfolio.
Stable Income Return.
An additional value of a real estate investment is in its long term returns. A lot of Americans lack the self discipline to put monthly deposits in IRA, SEP or 401k accounts. Investing in a rental property entails a certain amount of commitment. In a way, it becomes a forced retirement plan.
When managed well, investment properties have the potential to be a stable source of passive income upon retirement or even in the event of a redundancy situation. These days, job security cannot be guaranteed. Investing in real estate is a great way to gain financial independence so you are not solely reliant on your job for income.
When inflation is high, rents usually increase, as well. On the other hand, mortgage payments on the property remain stable. This means increased cash flow without the accompanying increase in expenses for holding the property. Additionally, during times of inflation, applying for mortgages becomes more expensive for average consumers. This translates to increased demand for rental properties and higher rental rates.
Real estate properties do appreciate in value, especially so in times of inflation. Increased value can mean sale and reinvestment in higher value properties, or provide an equity line of credit to use for other investments.
Some properties sell from $5k to even $15K below market value. Investing in properties like this results in instant equity which can then be used for additional leverage.
Other investors turn to property flipping to translate their investment to a quick buck. They may renovate, subdivide or develop and create value (some even through a simple paint job), so they make the most out of their investment.
One Major Drawback
Investing in real estate certainly presents many opportunities. It is important to consider, however, its major drawback. It is not a liquid asset. What does this mean? It means that if you want to convert it into cash, it can take time to materialize. Also on the flipside, even if you have the cash to purchase a property, the process of converting cash to asset likewise takes time.
However, given the many benefits, it is the case of the Pros far outweighing the Cons.
The Bottom-Line - Benefits of Investing in Real Estate
Investing in real estate presents many benefits. Real estate is an asset that invariably increases in value over time and has good long term returns. If you are looking to diversify your investments, real estate adds value by making your investment portfolio stronger and more stable. It offers tax incentives and is likewise an inflation-proof investment.
If you are looking to invest in real estate, I can help you search for property that fits your needs, your lifestyle and your budget.
Reach out to me at , or give me a call at 951-333-8065 and let’s discuss your ideas, todays market, and the benefits of investing in real estate.
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