Investing in real estate takes a lot of commitment. Whereas you can easily buy and sell a stock with little time and effort involved, buying real estate is much more difficult, hands-on, long-term and market specific. Maybe you’ve wondered whether investing in real estate is something you’d be interested in? There are definitely lots of benefits from investing in property. Here we’ve compiled a list of our top five reasons to invest in real estate.
Owning real estate means collecting rent checks! Whether you are leasing an office, warehouse, apartment, house, farm land, parking or storage space, you are getting paid (unless you have 100% vacancy or own only land). This is the income aspect of owning real estate and it only gets better. As rents rise your income increases. Assuming your expenses don’t increase as quickly (since your mortgage is fixed), your profits will grow (or your losses will shrink). Although it can be hard to find properties that make positive cash flow in year one, the growth from rents should keep growing and your income potential going forward increases dramatically. As an example, look at what apartments rented for 10 or 20 years ago compared to today. They often double every 15-20 years, and if you can keep your expenses relatively fixed, then your income will rise even faster than rents.
Most real estate increases in value over time. Although it is not always a linear path, over the long run, most real estate becomes more valuable. After all, land is a fixed resource. There is no more available and so the supply is fixed. As your property value goes up, so does your net worth! And it doesn’t stop there. As you pay off your mortgage, the principal payments reduce the amount you owe and therefore add to the amount of capital in your investment. That means you get two ways to increase your capital and net worth when you invest in real estate.
Favorable Tax Implications.
Buying real estate has many tax implications. Most of them are positive. For example, the interest you pay on your financing is typically tax deductible. Also, if you are buying the property strictly as an investment, you are able to put all of the expenses related to the property and the management of the property on a separate tax schedule and you only have to pay taxes on the “profit” shown by the tax forms. Because of depreciation expenses and other miscellaneous expenses (cell phone, Internet, mileage, tools, association dues), your reported income can be negative even though you are making substantial positive cash flow.
Diversification of Risk.
Real estate is a different asset class than stocks, bonds, money markets and other investments that you may have. This means that it behaves differently and therefore diversifies your investment portfolio. This has the effect of reducing your overall portfolio risk. For example, after the 2000 stock market crash, stocks fell 30-60%, but real estate prices actually rose. This is the type of diversification that real estate can add to your portfolio.
Protection from Inflation.
Inflation causes the prices of almost everything to rise over time. For example, the price of cement, wood and steel (all used to create real estate) have risen dramatically over the past 10 years. This inflation directly causes the prices of homes and real estate to also rise. Historically, real estate prices are tied to inflation rates and have outperformed inflation dramatically over time. If inflation were to increase dramatically, real estate prices would likely be protected from this increase.