Why You Should Start Investing in Real Estate
There’s a reason why “safe as houses” is a popular adage. Investing in real estate is one of the safest and most robust asset classes, especially for long term investments. The real estate market is also easier to enter and research, compared to stocks or shares.
There are two ways to start investing in real estate:
- First, you can fix-and-flip, or purchase rundown properties, repair and redecorate them, then sell them at a profit.
- Second, you can collect rents either by directly purchasing, owning and managing the property or through real estate investment trusts (REITs). REITs are corporations that purchase and manage real estate. REITs issue units are modeled after mutual funds and traded like stocks.
Here are some of the reasons why you should start investing in real estate:
1. Passive Income
Investing in real estate allows you to generate passive income. It’ll provide you with sufficient income to cover your expenses and give you the freedom to do the things you actually enjoy. You don’t need to be tied down to a desk job or spend all your life working for someone else.
Even when you’re sleeping or lounging on a beach, your investment and rental properties will earn you enough money to sustain your lifestyle.
2. Tax Benefits
You also get to enjoy numerous tax benefits from the income you get from investing in real estate. Some examples are the following:
- Tax deductions on cash flow, operating expenses, mortgage interest, property taxes, insurance, and depreciation.
- 1031 exchanges allow you to use the profits you gained from the sale of an investment property for the purchase of another one. This also defers the taxes you need to pay on the said sale.
- If you sell your property after a year, you’ll need to pay for capital gains tax. The rate for this tax is, in most cases, 15 to 20 percent lower than your personal income tax bracket.
3. Income Replacement For Retirement
A lot of real estate investors started out in order to achieve long-term financial security. Real estate properties are appreciating assets, which means their value will increase over time.
When you invest in real estate, you’ll gain a feeling of financial security that can see you through early retirement. Most people save up for retirement because they want to have enough to replace their current income from their jobs. After all, most retirees won’t have a steady stream of income to support them through their golden years.
Every real estate property you own is a step closer to income replacement. Eventually, you’ll reach a point where the income you generate from your properties is enough so that you don’t need to work anymore.
4. Community Welfare
More than just the personal financial benefits you stand to gain, investing in real estate can also benefit your community. Responsible investors can help improve communities by increasing available housing, maintaining properties that add value and improve the appearance of the area, and boosting local tax revenues.
For instance, when you buy a rundown home so that you can put it up for sale later on, you don’t just remove an eyesore, you help boost property prices in the area. The homes surrounding your property also increase in value since, after all, nobody wants to live next to a dilapidated home.
5. Better Returns, Less Volatility
Theoretically, the longer you hold on to a real estate property, the lower your risk of loss is. Real estate markets improve and properties appreciate in value over time. Land and buildings are tangible assets, meaning that you have more control over them.
While risk is something that you’ll always have to deal with, no matter the type of asset, real estate investments are less likely to end up in a loss as long as you play the game right.
Here the key factors to take into consideration to ensure better returns for your investment:
- Geographic location
- Stability of mortgage interest rate
- Market behavior
- Population density
- Inflation rate
Although the returns for your investment depend on a number of factors, the good thing is that real estate investments are essentially inflation-proof. Rental prices typically increase with inflation, while your mortgage payments still remain the same. You can increase the rent on your property to account for inflation and benefit from increased cash flow, without any additional expense for holding the asset.
All investments carry some risk. Real estate investments are no different. With the subprime mortgage crisis still fresh in the minds of most people, it’s crucial to research thoroughly and assess all your options before you enter this market.