Advantages of Investing in Real Estate
Finding good investments can feel next to impossible these days, between inflation, stock market gyrations, global concerns, and more. But one of the best investments might be the one you're sitting inside of right now – real estate.
This underrated but familiar investment opportunity has some major upsides you may not have considered. Of course, any time you’re dealing with investments, there are always going to be a few downsides to be aware of, too.
Let's take a closer look at what you need to know if you’re wondering: why invest in real estate.
What is Real Estate Investing?
Real estate investing is a broad term. At its core, it essentially describes many different ways people or groups can buy and sell real estate to grow their capital. Real estate investing can involve residential, commercial, or even industrial properties to receive future returns.
This form of investing can take several forms – house flipping, income property, multifamily syndication deals, and more. But among the simplest and most common methods is just buying a home to rent out to others.
Benefits of Real Estate Investing
So why invest in real estate? After all, it requires much more work than simply clicking a few buttons to invest in a mutual fund or stock. The truth is, there are many real estate advantages that make it such a popular choice for experienced investors.
When a homeowner pays their mortgage every month, a portion of that payment goes toward the interest. But the rest goes to paying down the loan and building equity. Equity is the value you have in a property. It’s the difference between what you owe and what the dwelling or land is worth.
Over time, regular payments will eventually leave you owning a property free and clear. That's the idea with real estate investing, too – except in the case of income property, your tenants (the people you rent to) are the ones paying a portion (or, in a really great deal, all of) the mortgage for you! You can simply sit back and watch your loan balance go down over time, as you gradually earn full ownership of a valuable real estate asset.
Real estate investors are lucky enough to have some significant tax advantages for their properties. For example, current tax law allows you to write off common costs like mortgage interest, taxes, insurance, repairs, and more, reducing your taxable income.
You can also depreciate a home's value over time, ultimately lowering your tax liability.
Finally, in the right circumstances, you might even be able to avoid paying taxes when you sell the property by using what's known as a 1031 exchange, where (subject to some rules) proceeds from the sale of one property can be invested tax-free in a similar, new real estate purchase.
Hedge Against Inflation
Anyone who's shopped or filled their tank recently understands how inflation can destroy the power of hard-earned cash. One of the most underrated real estate advantages is that, unlike many traditional investments, real estate value tends to go up, even during times of notable inflation.
Like other important assets, real estate often retains value and can therefore function as an excellent place to invest while higher prices eat away the gains of various other investments you may have.
Appreciation is one of the real estate benefits most commonly associated with this form of investing, and with good reason.
Appreciation refers to money made when the overall value of an asset rises between the time you purchase it and the time you sell it. For real estate, this can mean significant gains due to the generally high prices of the assets.
However, it's crucial to remember appreciation is a one-time thing and only provides money when you sell, not along the way. Still, real estate investors often enjoy appreciation on rent as time goes on, providing boosts to income.
As mentioned earlier, cash flow is the money that comes on a monthly or yearly basis as a result of owning the property. Typically, this is what's left over after paying all the necessary expenses – like mortgage payments, repairs, taxes, and insurance.
Some properties may have a significant cash flow, while others may have little or none. For investors who do enjoy this perk, the money can serve as valuable, regular income that's primarily passive in nature – one of the major advantages of investing in real estate.
New investors may not truly understand the power of leverage, but those who do unlock the potential for huge gains on their investments. Generally speaking, leverage in investing comes when you can own or control a larger amount of assets than you could otherwise pay for, through the use of credit.
Real estate offers one of the best opportunities to do this through the typical mortgage. Investors often put down 20% or less of the asking price on an investment property, yet they still can potentially take advantage of 100% of the cash flow and appreciation during their ownership. The leverage (the amount you borrow to purchase a property) lets you increase your return on your investment (ROI).
Savvy real estate investors will even use leverage they have on one property to secure additional pieces of real estate to create more passive income.
Far too many investors have their money parked in stocks or mutual funds, which tend to all rise and fall together. Real estate offers a different type of asset, which moves independently of these others and can provide important diversity to your portfolio.
Ask any professional investor, financial advisor, or economist – diversification is the key to steady, reliable, long-term gains on your money. You can even diversify within your real estate investments.
This can be done through a mix of residential, commercial, and other properties, each of which will react differently to changes in the real estate market and economy.
Cons of Real Estate Investing
Before you start making plans to be the next real estate mogul, it's crucial to understand there are also some drawbacks to real estate investing too. Here are the most important things to consider before putting your money into real estate.
Real Estate Costs
While new services allow people to start investing in the stock market or mutual funds with just a few dollars, it's arguably the case that traditional real estate tends to have a higher barrier to entry cost-wise.
Even investing in modestly priced homes or commercial properties can cost tens of thousands, or more, per property just in down payments and closing costs. Some down payments can even stretch well into the hundreds of thousands or millions.
Finding partners is sometimes possible, but you'll likely still need a good chunk of change to even be considered. Then, there are the ongoing costs to be aware of – repairs, long-term upkeep like replacing roofs and appliances, and the eventual costs of selling the property down the line.
Long Term Strategy
In many cases, real estate requires patience and an eye on the long run. What may look like a mediocre investment a few months after purchase could be a slam dunk in a few years. However, planning to invest for the long term can be difficult, and it can be hard to anticipate how the real estate market will move. Without a sound and reliable long-term strategy, real estate investing can be challenging to succeed in.
Beyond these other headaches, there can also be problems with renting, too. You may struggle to find renters, or end up leasing to problem tenants who damage property or cause trouble with neighbors.
In the commercial space, a business might suddenly go under. As the owner, the time and effort to resolve these problems (or the cost to pay others to handle them) is part of the deal for real estate investing.
It's true that real estate investing certainly isn't for everyone. High entry costs, difficulty managing tenants, and other longer-term issues can make this a less-than-attractive investment strategy for some.
But for many others, the benefits of investing in real estate far outweigh any potential drawbacks. The advantages of investing in property range from building equity, to potential positive cash flow, to tax breaks, and so much more. And with the specter of inflation continuing to loom, real estate might just offer you the valuable protection for your money you’ve been looking for.
Still, any investment decision is a personal one that shouldn't be undertaken without careful consideration. Be sure to weigh the pros and cons of investing in real estate with a financial advisor or tax professional. For the right investor, real estate can offer boundless opportunities to grow and protect hard-earned money.
And don’t let the thought that you need a ton of money to get started scare you. There are new, exciting, feasible, very affordable ways for anyone to get started in the world of real estate. Crowdfunding alternative investments are opening the door for regular investors just like you to now get a piece of big real estate opportunities.
Learn more about high yield, short term real estate investment opportunities with Connect Invest today. Sign up to get started.