What makes real estate a worthwhile investment? If you’re like our investors, you likely have more than one reason to value a real estate portfolio. What’s so compelling about real estate investment is that you do not benefit in only one or two ways for your efforts.
Buying stocks can pay off over time — they can even pay dividends. But real estate, ultimately, offers greater financial advantages.
What Kind of Real Estate Investments Work?
It’s important to note that, as we talk about the advantages of investing in real estate, we are primarily talking about passive, buy-and-hold investing in single-family properties. There are many different ways to invest and many different kinds of properties to target. However, for the sake of this article, we’ve narrowed our scope.
The truth of the matter is this: 401ks and a personal residence no longer cut it when trying to build long-term wealth.
Of course, every investment comes with risks and weaknesses that demand careful consideration. You, as an individual investor, are the only one equipped to determine what types of investments you should pursue based on your experience, risk tolerance, and resources.
At the same time, a compelling case can be made for buy-and-hold real estate investing!
4 Major Incentives for Investing in Real Estate
Real estate is a “tax shelter.” That is, investors have many tax incentives to take advantage of. After all, our tax code is not simply designed to tell us how much we owe Uncle Sam. It also involves incentives for businesses, individuals, and investors. Real estate benefits from multiple deductions and incentives that can save you a lot of money come tax time.
Depreciation — Depreciation incentivizes owners to keep their rental properties updated and well-kept by allowing them to write off assets that have a limited lifespan (such as an HVAC or roof) to keep the property in good condition for residents. This incentive was heightened by the Tax Cuts and Jobs Act.
Mortgage Interest — Real estate investors are not limited by how much mortgage interest they can write off as a deduction. Most investors will find that their passive income covers mortgage costs, but it doesn’t prevent you from being able to write off the interest costs accumulated!
Though the appreciation of a personal residence is not enough to hang your financial hat on, it is a great benefit in real estate investing. Because we buy and hold (that is, holding properties for five to ten years, sometimes longer) the appreciation of property is only natural. Real estate tends to be a hedge against inflation, meaning that during times where other investments would perhaps lose value, real estate values grow to compensate for inflation offsets.
Appreciation is a part of this equation. For investors, it means that your net worth will rise over time — as the value of the property increases and your outstanding debts decrease. As real estate investors, we’re more incentivized to perform quality property management and maintenance. This allows properties to retain and grow their value over time through careful upkeep.
You’ll hear it said that cash flow is king. It’s true, cash flow is a critical advantage in rental property investing. It’s advantageous in growing wealth over time, paying down debts, and covering ongoing expenses. For the real estate investor, cash flow may not always translate as “money in your pocket,” but it does help you build wealth over time — largely by contributing to your full ownership of a property, covering costs, and, then, building up your accounts.
It’s important to remember that no one factor — cash flow included — is singularly responsible for creating good returns or a prime investment.
Leverage can be a double-edged sword but it, by and large, offers a great advantage for real estate investors. In short, leverage is using other people’s money (namely, from bank lenders in the form of a mortgage) to fund your investment property acquisitions. The greatest advantage here is that you’re not having to pay-in-full for properties — which can get very expensive and makes it difficult to scale one’s portfolio.
By utilizing leverage, you can, say, purchase five properties at a down payment of $20,000 each or one property in full at $100,000. Those five properties will lend you greater equity, portfolio diversification, and streams of passive income than the single property.
Leverage can pose a risk when one becomes “underwater” on their mortgage (a major issue during the Great Recession), in which you owe more on the property than it is worth. However, investors rarely have to worry about this, particularly in comparison to an average homeowner.
All things considered, real estate investing offers multi-faceted benefits for the investor. Combined, these benefits serve to strengthen a buy-and-hold portfolio.
Your REI Nation advisor is waiting for your call. Invest in turnkey real estate today!