Passive Income. Equity. Monthly rents. Tax Breaks. These are some of the benefits that come with investing in real estate.
While investing in apartment buildings, commercial properties and single-family homes can bring extra income each month and big paydays, it also comes with risk. The goal is to invest in properties that increase in value over time.
If you understand the risk and are willing to do the research, finding the best places to invest in real estate could provide you with a solid income boost. Here is a look at the benefits:
Steady Cash Flow
Owning real estate is a way to boost your monthly income. Whether you invest in commercial real estate or residential, you can rent out your space to tenants. You will then receive a monthly income in the form of rent checks. To be on the safe side, you will need to research the payment histories of your tenants if you want to reduce the chance that these tenants will one day stop paying their rent.
If the real estate you own increases in value over time, you can sell it for a solid profit. However, remember that appreciation is not guaranteed and as such, you will need to invest in the right property to see those significant returns.
Real estate is a long-term investment, meaning you can hold it for several years as you wait for it to appreciate. While you wait, you can rent out your real estate to net yourself a significant monthly income.
Investing in real estate comes with tax benefits. You can deduct several expenses associated with owning an investment property, including your property taxes, mortgage interest, property management fees, property insurance, ongoing maintenance costs, the cost of repairs and the money you pay to market your property to potential renters. If you sell your property for more than you paid for it, the gain you realized won’t be taxed as income. Instead, it will be taxed as capital gains that typically come with lower tax rates than income. If you invest in opportunity zones – neighborhoods that require investment, you will pay even less in capital gains.
Adding real estate to your investments boosts your diversification which can protect you in times of economic turmoil. Say certain stocks are suffering because of an economic downturn, the investment properties in your portfolio might still be increasing in value, protecting you from the losses your other investments are taking.
Investment properties bring much-desired passive income which you don’t have to work for every day. Say you charge rent on a single-family or multifamily property; the rent checks that come in each month are an example of passive income.
Ability to Leverage Funds
The most important advantage of real estate investing is LEVERAGE! It is the use of borrowed capital to increase the potential return of an investment. In real estate transactions, leverage occurs when a mortgage is used to reduce the amount of investor capital required to purchase a property. The annual return on a $200,000 property with a $20,000 net cash flow purchased with cash is 10 percent.
Now, let’s assume a loan of $150,000 is amortized over 30 years at 5 percent interest, but 75% of the money required to purchase the property is borrowed, even factoring in the cost of making the mortgage payment the annual return more than doubles to 22 percent.
Once you have built up an equity position in an investment property, you can leverage that investment for cash in one of two ways: Secure a second loan against the increased equity or refinance the original loan amount plus the increased equity. This frees up money to buy another investment property.
Protection Against Inflation
Real estate investments are considered protection against inflation. When the price of goods and services is rising, home values and rents typically increase, too. Investment properties can then provide you with rising monthly income and appreciation to help protect you financially when the costs of everything else are going up too.
Chance to Build Capital
The big goal of real estate investing is to increase your cash, otherwise known as building capital. When you sell a property that has risen in value, you will boost your capital. The key, of course, is to invest in the right properties that will increase in value.
There is one final advantage to a real estate investment: it is relatively easy for everyone get involved. While Wall Street is becoming more and more of a mystery and the game of Investment Bankers, real estate investing is looking better for the average person.
Let us know in the comment section below if you are thinking of investing in real estate.