The benefits of investing in real estate are various. With all around picked assets, investors can appreciate predictable cash flow, excellent returns, tax advantages, and diversification-and it’s feasible to leverage real estate to create financial stability.
Thinking about investing in real estate? Here’s what you really want to know about real estate benefits and why real estate is viewed as a wise investment.
Cash Flow
Cash flow is the net income from a real estate investment after mortgage payments and operating expenses have been made. A critical benefit of real estate investing is its ability to generate cash flow. In many cases, cash flow just strengthens after some time as you pay down your mortgage-and develop your equity.
Tax Breaks and Deductions
Real estate investors can take advantage of various tax breaks and allowances that can save cash at tax time. In general, you can deduct the reasonable expenses of owning, operating, and managing a property.
And since the expense of buying and improving an investment property can be depreciated over its valuable life (27.5 years for residential properties; 39 years for commercial), you benefit from decades of derivations that help lower your taxed income.23
Another tax perk: you may have the option to concede capital gains by using a 1031 exchange.
Appreciation
Real estate investors make cash through rental income, any profits generated by property-subordinate business activity, and appreciation. Real estate values will more often than not increase over the long run, and with a wise investment, you can make money when it’s opportunity to sell. Leases also will generally ascend after some time, which can lead to higher cash flow.
This chart from the Federal Reserve Bank of St. Louis shows average home prices in the U.S. since 1963. The areas shaded in gray indicate U.S. recessions.
Create Equity and Financial stability
As you pay down a property mortgage, you develop equity-an asset that’s part of your net worth. And as you develop equity, you have the leverage to buy more properties and increase cash flow and wealth much more.
Portfolio Diversification
Another benefit of investing in real estate is its diversification potential. Real estate has a low-and sometimes negative-correlation with other major asset classes. This means the addition of real estate to a portfolio of differentiated assets can lower portfolio volatility and give a higher return for every unit of risk.
Real Estate Leverage
Leverage is the utilization of various financial instruments or acquired capital (e.g., obligation) to increase an investment’s potential return. A 20% up front installment on a mortgage, for example, gets you 100 percent of the house you want to buy-that’s leverage. Because real estate is a tangible asset and one that can fill in as collateral, financing is readily available.
Competitive Risk-Adjusted Returns
Real estate returns vary, depending on factors, for example, location, asset class, and management. In any case, a number that many investors aim for is to beat the average returns of the S&P 500-what many individuals allude to when they say, “the market.”
Inflation Hedge
The inflation hedging capability of real estate originates from the positive relationship between GDP growth and the demand for real estate. As economies expand, the demand for real estate drives rents higher. This, in turn, translates into higher capital values. Therefore, real estate will in general maintain the buying force of capital by passing a portion of the inflationary tension on to tenants and by incorporating a portion of the inflationary strain in the form of capital appreciation.