Why Invest In Real Estate? 10 Reasons And Benefits
February 29, 2024 7-minute read
Author: Sam Hawrylack
Did you know you can invest in real estate with little capital? Some investors start investing in real estate with as little as 20% down on the property.
If you’re wondering why you might invest in real estate, keep reading to learn the top benefits real estate investors reap, and then find the best places to invest in real estate to start your journey.
10 Benefits Of Real Estate Investing
Real estate investors realize different benefits based on risk tolerance, the amount invested and their investment strategy.
1. You Can Diversify Your Portfolio
A diversified portfolio lowers the risk of a total loss. For example, what happens if you invest all your capital in stocks and then the stock market crashes? You may lose everything.
But, if you diversify into other markets, such as the real estate market, you have money invested in uncorrelated markets, reducing the risk of a total loss. To further the diversification, you can invest in different real estate markets across the country or various types of real estate investments. For example, you could invest in rental properties, fix and flips, and real estate investment trusts.
2. You Have A Variety Of Real Estate Investment Options
Real estate investors have many types of real estate investments to consider, allowing opportunities for those looking for investments with potentially high returns or conservative options to find what they need.
- Residential properties: You can purchase single-family homes, condos or townhomes to use as rental property. This creates passive income and allows you to earn capital appreciation as the home's value increases.
- Commercial properties: Investing in commercial property allows for more diversification and the potential for rental income. Like residential properties, you are the landlord, handling property management and collecting passive income from business owners.
- House flipping: Buying undervalued properties, fixing them up, and selling them for a profit is another option for a real estate investment. You don't have to hold onto the real estate or worry about property management; you may also earn capital gains faster.
- Real estate investment trusts (REITs): Real estate investors who want to passively own real estate can invest in REITs or real estate investment companies that own and manage real estate. Investors earn rental income and capital gains according to their investment but have no responsibility for the properties themselves.
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3. You Could Earn Passive Income
One of the largest benefits of real estate investing is its passive income opportunities. You can use the income earned to build a larger real estate portfolio, pay monthly expenses or save for other financial goals.
A few ways to earn passive income with real estate investments include:
- Buy and hold properties: When you rent properties, you earn passive income. While you have to perform some work to maintain and manage the property, overall, the monthly income is passive.
- Hire a property management company: You can invest in residential and commercial real estate, then hire a property management company to handle the properties, making your income completely passive.
- Invest in REITs: Real estate investment trusts allow real estate investors to invest money in commercial and large residential real estate projects without the responsibility of managing the properties, providing 100% passive income.
4. You May Enjoy Tax Benefits
Real estate investors enjoy many tax benefits, including tax breaks and deductions, especially if they treat their real estate investments as a business.
The IRS allows investors to deduct expenses involved in their real estate business if they can prove material participation. The expenses you may be eligible to deduct include the following:
- Mortgage interest: If you finance investment properties, you may be able to deduct the interest paid on the mortgage.
- Depreciation: Real estate investors can often deduct depreciation for residential and commercial properties over their useful life (27.5 years and 39 years, respectively).
- Cost of running the business: If you prove you materially participate in the business, you may be able to deduct the cost to own, operate and manage your investment property.
- In addition, if you use the 1031 exchange rule, you can defer taxes on capital gains earned on an investment property. With the 1031 exchange, you sell one investment property and, within 180 days, close on another real estate investment property, keeping the funds invested and deferring tax payments until you sell the final property and keep the capital gains.
It's important to talk to your tax advisor to see if these benefits apply to you.
5. Your Property May Appreciate In Value
Real estate properties typically appreciate over time, increasing a real estate investor's profits, especially if you invest for the long term.
You can turn property appreciation into cash flow by leveraging the profits with mortgage financing or selling the property for a profit. For example, if you purchase a property for $100,000 and sell it for $200,000, you walk away with $100,000 in capital gains before taxes and closing costs.
6. You Have The Potential To Build Capital
To invest in real estate, you need capital or money to invest in a property. Your first investment may be highly leveraged with mortgage financing. But you can build capital when the property appreciates, and you have equity. This allows you to increase your real estate portfolio by investing more capital.
To access the capital, you can sell the property and reinvest the funds in another property or use a cash-out refinance to access some of the home's equity, providing you with more capital to increase your real estate portfolio, earning more income.
7. You Could Have More Protection From Inflation
Some investments don’t keep pace with inflation, causing your dollar to be worth less than when you invested. Real estate, however, provides a hedge against inflation because as inflation rates increase, so do real estate prices typically. This allows your investment to keep pace with inflation and you to retain the power of the dollar.
8. You May Be Able To Finance Your Property
Leveraging your real estate investment is one of the best benefits of real estate investing. Unlike investing in stocks or bonds, you don’t need enough cash for the total investment cost. If you qualify, you can finance the purchase, investing only a percentage of the investment property’s cost.
Some real estate investors are also eligible to finance multiple properties, increasing the chance of higher monthly cash flow and allowing more opportunity for greater capital gains.
9. You May Be Able To Choose Your Level Of Involvement
Real estate investors can manage rental property themselves or hire a property management company to do it for them. This allows you to control your investments, whether you want a completely passive opportunity with higher costs, allowing a management company to handle it, or you want complete control over the rental property.
10. Your Property Could Be A Generational Investment
A real estate investment can become generational if you pass it down to your heirs, creating financial stability for future generations. Many investors create a family business by starting an LLC to own and operate real estate investment properties, passing it down to family members for many years.
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Real Estate Vs. Other Investment Types
If you’re new to investing, it’s important to consider your alternatives and see how they compare.
- Stocks: To invest in stocks, you must have enough capital to purchase the desired number of shares. Your investment fluctuates based on market performance and how individual companies perform. Stock investments are usually more volatile than real estate investments.
- Bonds: Bonds are less risky than stocks but require a full investment upfront. Because of their conservative nature, bonds have much lower returns than most real estate investments.
- Certificates of deposit: CDs offer liquidity but low returns compared to real estate. They are a good option for the capital you want to keep liquid for emergencies or short-term financial goals.
- Mutual funds: Mutual funds are diversified investments tied to the stock market. Like stock investments, you must have enough capital to purchase the investment, but the performance of the funds is more diversified than individual stocks, reducing your risk.
Investing In Real Estate FAQs
If you wonder if real estate is a good investment or if the benefits of real estate investing are worth it, check out these frequently asked questions.
Is real estate a good investment?
Any investment has risk because there's no guarantee it will perform as you anticipate. The key to ensuring your investment property is a good investment is to do your research. Know the area, potential for capital appreciation, rental income, and selling it, and purchase properties you know you can afford and manage to realize the cash flow you desire.
What are the challenges of investing in real estate?
Like any investment, real estate investing creates the risk of a total loss. If you invest in an area with declining property values, no rental demand, or few sales, you may be stuck with a property you don't want.
Real estate investing also requires ample capital to purchase and manage the property, as well as the time and capability to maintain the home and manage tenants if you choose rental property versus a fix-and-flip or real estate investment trust.
Is investing in real estate better than investing in stocks?
It's often a good idea to diversify your capital across many investments, including stocks and real estate. This allows your money ample opportunity to grow at different times since the stock and real estate markets aren't correlated. Putting all your money in one investment, whether stocks or real estate, can be too risky. But diversifying can reduce your risk of loss.
Where can I find an investment property?
There are many ways to learn how to find investment properties, including working with a real estate agent, consulting the MLS, getting to know areas, talking to homeowners, and watching for abandoned properties or those about to go up for foreclosure or short sale.
The Bottom Line
Why invest in real estate? The reasons are numerous and vary by investor. Most people, however, enjoy tax benefits, a hedge against inflation and earn passive income. They also may see capital appreciation on their investments.
You may be eligible to leverage your investment in real estate. Get started on your mortgage approval today to discover if you’re eligible.
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