Why is Investing in Property a Good Idea?
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Diversifying your investment portfolio is essential and real estate is a great way to diversify your investment portfolio. Is investing in real estate still a good idea? According to millionaires who made millions by investing in real estate, the answer is a resounding yes.
With real estate investments, you can offset the risk of high-risk investments, such as money invested in the stock market. In addition, if you invest in rental homes, you can enjoy the cash flow while the home appreciates, giving you significant capital gains when you need it most in retirement.
Real estate can be a liquid asset if you need it to be. Don’t invest money you’d need immediately, but know that any money you have invested in properties you can usually liquidate within a few months if required. If you’re selling an investment property, Real estate is still the best investment you can make today.
If you’re thinking about investing in real estate, you’re about to embark on one of the best investment journeys of your lifetime. Real estate has the potential to deliver very high returns in the long run. It can provide a steady cash flow and enjoys several tax benefits.
The benefits of investing in real estate are numerous. With well-chosen assets, investors can enjoy predictable cash flow, excellent returns, tax advantages, and diversification and it's possible to leverage real estate to build wealth.
Many people avoid real estate investments because they think they are scary or need a lot of money to invest. Neither is accurate, and to reassure you, here are eight great reasons why real estate is a good investment.
Demand for rental housing is rising. Of course, there’s always the risk of tenants defaulting or vacating the home early, but there’s a risk with every investment. Without risk, there can’t be a reward.
Steady Source of Income and Cash Flow
If you buy and hold real estate, you can earn monthly cash flow renting it out. Cash flow is the net income from a real estate investment after mortgage payments and operating expenses have been made. A key benefit of real estate investing is its ability to generate cash flow.
This increases the profits from owning real estate since you aren’t relying only on the appreciation but the monthly rental income. It may seem overwhelming to buy investment real estate and find quality tenants and manage the property, but there are many available resources to help you.
Residential properties can generate income year-round. Investing in real estate is a great idea if you are in it for the long haul, not a quick return.
Your best bet is investing in residential properties that produce rental income year-round. Just make sure you understand all of the associated legal fees and are prepared for unexpected costs.
Tax Benefits and Deductions
Real estate investors can take advantage of numerous tax breaks and deductions that can save money. You can deduct the reasonable costs of owning, operating, and managing a property.
Real estate has incredible tax benefits. In certain situations, you don’t have to pay taxes on your gains from investment properties. You can also get a $250,000 tax break as an individual and $500,000 as a married couple.
You can have a lucrative rental property using other peoples’ money to cover the mortgage, taxes, and upkeep. With sites like Vrbo and Airbnb, you can also find short-term renters to subsidize your overhead.
And since the cost of buying and improving an investment property can be depreciated over its useful life (27.5 years for residential properties; 39 years for commercial), you benefit from decades of deductions that help lower your taxable income.
When you own a home and rent it out, you run a business as the landlord. As the business owner, you can often write off the following expenses:
The mortgage interest paid on the loan
Origination points paid on the loan
Maintenance expenses
Depreciation (spread out over 27.5 years)
Real estate taxes, homeowner’s insurance, and HOA dues
Always talk to your tax advisor before assuming you can write expenses off, but know that investing in real estate is a benefit.
The wealthiest people collect property the way they used to collect cars. Interest rates are low, prices have fallen, and you don’t have to tie up a lot of cash in the investment. At the same time, more people are choosing to rent instead of own.
You can increase the rate of appreciation by making renovations or repairs. Not all renovations increase a home’s value, so if you’re making renovations to increase its value, work with a licensed appraiser or real estate agent to find out the best renovations you should make.
You won’t get a dollar-for-dollar return on your investments, but some renovations can pay you back as much as 80% – 90% of the money invested.
Capital Appreciation
Real estate investors make money through rental income, and appreciation. Real estate values tend to increase over time, and with a good investment, you can turn a profit when it's time to sell.
Rents also tend to rise over time, which can lead to higher cash flow. Unlike stocks or bonds, you can force the real estate to appreciate. On average, real estate appreciates 3% – 5% a year without you doing anything except maintaining the home.
The right investment will continue to appreciate. Real estate is real, and it’s always a good idea to put your money in real assets. But let me be clear: That doesn’t mean that all real estate is a good idea.
Stay away from low-income areas and single-family homes. But even those assets are probably a better place to store your money than letting cash depreciate while sitting in the bank.
Build Equity and Wealth
When you pay down a property mortgage, you build equity which is an asset that's part of your net worth. And as you build equity, you have the leverage to buy more properties and increase cash flow and wealth.
Owning property can make you rich. When you invest in real estate long-term, you know you have an appreciating asset. It may go through hills and valleys, losing some value along the way, but housing usually bounces back if you hold onto it long enough.
Most people invest in real estate to supplement their retirement income. Whether you own the property while you’re retired, earning the monthly rental cash flow to supplement your income, or you sell a property once you’re in retirement and make a profit, you’ll increase your income.
Some people feel more secure knowing their money is invested in a safe investment like real estate rather than leaving it in a cash account or investing it in the stock market.
Depending on the value of your properties, you may even be able to pay cash for future property purchases, increasing your portfolio and the equity in it even much faster.
Portfolio Diversification
Another benefit of investing in real estate is its portfolio diversification potential. The addition of real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk.
One way to use an investment property’s equity is to use it to grow your real estate portfolio. For example, let’s say you have $100,000 equity in a home. You can refinance the mortgage on it, take out the $100,000, and use it as a down payment on your next property.
Real Estate as a Leverage
Leverage is the use of various financial instruments or borrowed capital like debt to increase an investment's potential return. A 20% down payment on a mortgage, for example, gets you 100% of the house you want to buy, that's leverage.
This leverage makes property investment a viable opportunity for aspiring investors. What’s more, leverage comes at a very low price because at 7-8%, home loans are possibly the cheapest form of credit.
Because real estate is a tangible asset and one that can serve as collateral, financing is readily available. One advantage of investing in real estate is that it can be financed through debt. Unlike bonds, mutual funds or stocks, one can invest more than his current net worth in real estate.
Most lenders require only 20-30% as down payment. It gets even better if the house is self occupied or given out on rent. The importance of background checks, due diligence and comparative price evaluations cannot be undermined.
For example, let’s say you found a home for $100,000; if you put down $10,000, chances are you could find a loan to finance the rest as long as you have good credit and stable income. With that, it means you invest just 10% of the asset’s value and own it.
Real estate is a bankable asset, so you can always leverage it. It also doesn’t tie up a lot of cash. You can put down as little as 10% and use banks’ money to grow your investment. With such low interest rates, that’s like free money.
With real estate, you can put down a fraction of the home’s cost and invest in it. Then, as you pay down the mortgage, you’ll hold more of the investment, increasing your rate of return not only by paying the mortgage down but also with the price appreciation of the real estate.
Still, a number that many investors aim for is to beat the average returns of the S&P 500. The only people who lose money in real estate are those who bought at the height of the market and sold at the wrong time or took too much equity out of their home, leaving no profit margin when they sold it. It often takes time to see big price appreciation, but if you hold on to your investment, you will.
Risk-Adjusted Returns
Real estate is always a great investment because you have more options than with other types of investments. If you invest in stocks, bonds, or a private offering, your success is completely dependent on factors outside of your control.
Real estate returns vary, depending on factors such as location, asset class, and management. With real estate, you have unlimited options. You can buy a house with the intent of flipping it, then rent it if the market turns south.
If you buy a rental that appreciates in value significantly, you can sell it. Real estate can be refinanced, rehabbed, and rezoned. You can develop it, lease it, subdivide it, or add parcels to it.
Real estate offers unlimited options. At most, your options are to hold or sell. These are just a few of your options. This flexibility is one of the reasons it has created more millionaires than any other asset class.
Inflation Hedge
The inflation hedging capability of real estate stems from the positive relationship between GDP growth and the demand for real estate. The demand for real estate drives rents higher. This, in turn, translates into higher capital values.
Real estate tends to maintain the buying power of capital by passing some of the inflationary pressure on to tenants and by incorporating some of the inflationary pressure in the form of capital appreciation.
There are several ways that owning real estate can protect against inflation.
Property values may rise higher than the rate of inflation, leading to capital gains.
Rents on investment properties can increase to keep up with inflation.
Properties financed with a fixed-rate loan will see the relative amount of the monthly mortgage payments fall over time, for example, $1,000 a month as a fixed payment will become less burdensome as inflation erodes the purchasing power of that $1,000.
Real estate is also an effective tool against capital loss if the purchasing power of the currency depreciates due to inflation or other macroeconomic trends.
REITs must pay out 90% of income to investors, so they usually offer higher dividends than most stocks. Investors can now take a smaller exposure through real estate investment trusts (REITs).
Real Estate Investment Trusts (REITs)
If you want to invest in real estate, but aren't ready to make the jump into owning and managing properties, you may want to consider a real estate investment trust (REIT). You can buy and sell publicly-traded REITs on major stock exchanges.
REITs are companies that own, operate and finance income generating real estate assets. They are popular as they are regulated and offer liquidity as they are publicly traded.
Buying is Smarter than Renting
Most millionaires I know made more money from owning real estate than any other investment. Real estate consistently increases in value over time and outperforms other investments. Plus, it isn’t as vulnerable to short-term fluctuations as the stock market.
You get a tangible, usable asset, whether you’re renting out an apartment or commercial building for income or buying a home. And there can also be tax benefits for investment properties.
It’s always a good time to buy real estate. In fact, the real wealth is made by buying when everyone else is selling and vice versa. If you rent your property to someone else, you can cover your mortgage or better.
People will always need a place to live
There’s an opportunity for greater and more consistent returns with real estate than with other investments. The large number of new properties each year is a testament to the growing real estate market.
Supply follows demand, and demand is continuing to rise. Populations almost never decrease, which is why the need for housing increases year over year.
You can invest in land that produces income
Many businesses come and go, but there’s one thing we’ll always need: land. There’s an inherent demand for real estate, whether the land produces a product like coffee or is home to an apartment or retail space; so it will always be a good investment.
No matter what kind of business you run, you need land. Investing in real estate allows you to protect yourself and your wealth. While the real estate market has gone up and down, it has never declined over time. Over time, you will always get value from real estate that produces income.
Ways to Invest in Real Estate
If buying real estate and renting it out is too hard for you, there are many other ways to invest in real estate, including:
Buy an undervalued property (fix and flip)
Be a wholesaler working as the middleman between buyer and seller.
Buy a 1 – 4 unit property, live in one unit, and rent out the others using the rental cash flow to cover your mortgage.
Invest in a Real Estate Investment Trust (REITs)
Inheritance
What Makes a Good Property for Investment?
Everyone wants to know what property is the best to invest in to make the most money. While there’s not a one-size-fits-all answer, there are specific things to look for when you invest in real estate, including:
Look for a location that’s attractive for renters or with appreciating homes.
Make sure the area has all the amenities and conveniences most homeowners want
Look at the area’s crime rate, school ratings, and tax history.
Invest in homes that renters want in the area
Pay attention to the prices of recently sold homes to see the average sales price today and compare it to historical prices.
Despite all the benefits of investing in real estate, one of the main drawbacks is the lack of liquidity or the relative difficulty in converting an asset into cash and cash into an asset. A real estate transaction can take months to close.
Real estate is a distinct asset class that's simple to understand and can enhance the risk-and-return profile of an investor's portfolio. On its own, real estate offers cash flow, tax breaks, equity building, competitive risk-adjusted returns, and a hedge against inflation. Real estate can also enhance a portfolio by lowering volatility through diversification, whether you invest in physical properties or REITs.
Downsides of Investing in Real Estate
There are pros and cons to investing in real estate. Knowing the negatives can help you make smarter choices and protect investments.
No Guarantee
There’s no guarantee a property will appreciate or that you’ll make profits. Many factors determine what happens. Like most investments, real estate almost always bounces back. So if you’re in it for the long haul, you should be on target to make a profit.
Time-Consuming and Exhausting
If you buy and hold real estate, you’ll want to rent it out to make money. But if being a landlord is too much for you, consider hiring a property management company to not have the headache of managing the property yourself.
Tough to Get Financing
Securing financing for an owner-occupied property is usually easy if you have decent credit and stable income. When buying a home to fix and flip, lenders aren’t as generous with their financing options.
They often have stricter requirements, including higher credit scores, lower debt-to-income ratios, and much higher down payments. For example, many lenders require 30% of the purchase price as down payment to secure financing even if you have good credit.
No Guarantee of Cash Flow
There’s no guarantee that you’ll always have tenants. If your tenant’s bail on you, the mortgage and expenses fall on your shoulders. If you have a mortgage, you must keep paying it even though you aren’t receiving rent. You need a solid emergency fund and be stable in your finances to handle any situation that may come your way.