5 Reasons you should invest in real estate
Whether you’re a Monopoly fan or just keen on maximizing a return on your investments, real estate investing continues to be a sound practice for many to manage their assets.
Given the abundance of investments available on the financial market, it can be difficult to differentiate between how to diversify one’s portfolio and how much to invest in one sector, such as real estate.
Amid such concerns, real estate offers a variety of benefits compared to other investment strategies that can help assure you that you’re putting your money in the right place.
Real estate appreciation
Real estate appreciation is not how much you like real estate but how much the value of the properties you’ve acquired will increase in value over time.
Depending on the market you are investing in, particularly in urban markets, limited space and availability combined with zoning restrictions that limit commercial or residential development can make certain locations extremely valuable.
Likewise, real estate typically tends to gain in value over time as development increases within an area and demand increases for homes, rental units, or commercial units.
Although appreciation rates can vary between markets and from year to year, the average appreciation since 1896 has been .3% per year after inflation, providing a valuable income stream despite economic volatility.
Consistent Cash flows
Investing in real estate can take many forms, all of which have the ability to generate cash flows that exceed typical market rates for other investments. For some, buying a single-family home and renovating, or flipping the home, can provide a sizable profit in in-demand neighborhoods.
Other investors may choose to buy and rent a home or building, generating consistent rental income as a primary or secondary means of income (if you still live in the building).
Other investors may consider investing in commercial real estate which can generate returns of 6-12% but only requires investors to manage the mortgage on the property while leaving all of the property management and business taxes to the leasees.
Ultimately, unlike other assets that only generate income once sold, a rental property can generate income during the duration of ownership.
Robust portfolio diversification
Having a diversified investment portfolio serves two purposes. First, some assets, such as stocks, options, and futures, are considerably volatile relative to gains and losses, particularly for those who are engaging in short-term trading.
Investing heavily in any of these asset classes can lead to considerable losses relative to market performance. Further, inflation relative to the price of goods can diminish the gains seen from returns on any investment.
Investing in real estate can diminish the effects of both of these concerns. Given the constant appreciation and cash flow, some real estate investments can generate, real estate investment has been shown to potentially reduce portfolio volatility by 60-94% depending on the type of real estate and the extent of the investment.
Additionally, because inflation takes into account rents for residential and commercial properties, increasing inflation can lead to additional income that will ultimately lead to a greater return on the real estate being managed.
Because property values are constantly increasing, particularly when housing prices increase relative to rental costs, investing in real estate can provide a valuable alternative as an income generator relative to inflation.
Tax Advantages of real estate investing
One of the many benefits of real estate investing is that it is usually a very favorable investment relative to tax breaks and credits, particularly when compared to capital gains taxes.
Depending on the type of real estate owned, expenses such as real estate taxes and mortgage interest can be deducted as expenses, while residential and commercial property owners can potentially deduct property insurance and building maintenance expenses as write-offs.
Property owners can also deduct for property depreciation and submit for a pass-through deduction if the property owned is a sole proprietorship. In many instances, property owners can even avoid paying the FICA tax that is obligated for self-employed taxpayers.
While short-term capital gains are applied to real estate that is held for less than one year, those selling a home can deduct up to $250,000 for single filers, providing another tax-based incentive for real estate investment.
The ultimate benefit to investing in real estate is that the equity generated from property ownership can then be leveraged for other capital acquisitions, offsetting any expenses or potential losses from taxes or other real estate-related expenses.
The ease of REITs
Those who don’t want to own a property outright but still want to benefit from the consistent gains of real estate investment, REITs, or real estate investment trusts, offer many benefits compared to other securities.
REITs invest in commercial real estate, which typically sees a more consistent market performance relative to private residential investment. More importantly, 90% of the taxable income generated is required to be distributed to shareholders, providing consistent dividends relative to market performance.
The long leases and consistent interests paid by commercial property leasees mean that REITs generally provide a consistent return relative to other asset classes.
Although there are many nuances to investing in real estate, such as deciding between what type of property to purchase, where to purchase the property, and how long to hold onto this property, real estate investments have a proven track record for consistent gains relative to other investment classes.
For those with sufficient capital and who are willing to make the initial investment in a property, real estate investing can prove to be a worthwhile investment for many years to come.
