Real estate investing provides many advantages. By selecting quality assets, investors can reap predictable cash flow, high returns, tax advantages and diversification advantages; furthermore it can even be leveraged to create financial security.
Are You Thinking About Investing In Real Estate? Here Are All the Essential Information About Real Estate Benefits And Why It Is Considered as a Wise Investment Option
Cash Flow
Cash Flow Cash flow refers to the income from real estate investment after payments for mortgage and operating expenses have been made. A key advantage of real estate investment lies in its ability to generate cash flow; often times this income just continues growing over time as you pay down mortgage and build equity in properties you invest in.
Tax Breaks And Deductions
Real estate investors can take advantage of various tax breaks and allowances to save cash at tax time. In general, you can deduct all expenses related to owning, operating and managing properties as reasonable expenses incurred during ownership and management.
As the cost of buying and improving an investment property can be depreciated over its useful life (27.5 years for residential properties and 39 years for commercial), its expenses can be amortized over many years and help lower your taxed income23.
Another tax benefit: using a 1031 exchange, you could possibly defer capital gains.
Appreciation
Apreciation Real estate investors make money through rental income, any profits generated from property-subordinate business activity and appreciation. Over time, real estate values will often appreciate, providing the potential for a profitable sale in the future. Lease payments also tend to rise overtime leading to a greater cash flow from leasing arrangements.
This chart from the Federal Reserve Bank of St. Louis displays average home prices since 1963 in the U.S. During recessions, areas shaded gray appear.
Create Equity And Financial stability
As you pay down a property mortgage, equity – an asset which forms part of your net worth – builds. By increasing this asset’s value over time, your leverage increases to purchase additional properties, thus expanding cash flow and wealth considerably further.
Portfolio Diversification
Diversifying Your Portfolio Real estate investments offer diversification potential. As it tends to exhibit low or even negative correlation with other major asset classes, adding real estate as part of a diverse portfolio can reduce portfolio volatility and bring greater returns per unit of risk taken on.
Real Estate Leverage
Real Estate Leverage Leverage refers to the use of various financial instruments or acquired capital (e.g., obligations) in order to increase an investment’s potential return. A 20% downpayment on a mortgage would get you 100% ownership – that is leverage. With real estate serving as both tangible asset and collateral for financing purposes, financing should not be an issue.
Competitive Risk-Adjusted Returns
Real estate returns can vary significantly based on factors like location, asset class and management. One goal many investors strive for is to outstrip the average returns of the S&P 500 index-what most refer to when speaking of “the market”.
Inflation Hedge
Real estate’s inflation hedging capabilities stem from its strong positive correlation between GDP growth and real estate demand. When economies expand, demand for real estate drives rents higher and capital values upward. Real estate typically maintains its buying power by passing some inflationary strain through renter lease payments while also including some strain in terms of capital appreciation.