Is real estate a good investment for you?

Is it good to invest in real estate? There’s no question about it – real estate is a strong investment choice in the right situation. When listing the reasons to invest in real estate, it’s impossible to ignore the benefits: various financing opportunities and the potential for steady, reliable, passive income.

We’ll cover the reasons why real estate investing could be a great opportunity for you and why you may want to put it at the top of your priority list.

Benefits of real estate investing

As mentioned, you can benefit from real estate, but the reasons differ depending on your risk tolerance, investment amount, and strategy.

Potential source of reliable income

Real estate investing can generate a reliable income stream, particularly from rental properties. Rental properties can provide consistent cash flow when managed properly, which may also require ongoing maintenance, maintaining positive tenant relationships, and balancing market fluctuations to maintain steady income.

For example, if you purchase a rental house, you may be guaranteed a reliable income as long as you repair the HVAC system as needed, maintain excellent communication with tenants, and understand the happenings in your community (such as an economic downturn that could cause tenants to leave the area).

Chance to diversify your portfolio

Diversifying your portfolio means reducing your risk of total loss by spreading investments across uncorrelated markets. For example, in investing, it might be risky to put all your money into a single stock, particularly if the stock market crashes. However, by investing in a variety of investment types – stocks, mutual funds, index funds, etc. – you diversify your investments and spread the risk so you’re not likely to lose all your money. If one stock isn’t doing well, your mutual funds can “pick up the slack” and earn more than that single stock so you avoid putting all your eggs in one basket.

Adding real estate investments to your portfolio is another way to help lower overall risk. You can also invest in different real estate markets or types of real estate, like rental properties, fix-and-flips, or REITs.

Variety of real estate investment options available

You can have your pick from a real estate buffet. Investors can choose from many investment types to achieve high returns or choose more conservative options. This variety allows you to choose investments that fit your goals and risk appetite. Check out the following real estate investment possibilities:

• Residential properties: You can rent out properties designed for people to live in, such as single-family homes, condos, or townhomes, which provide passive income and potential property value growth.
• Commercial properties: Buying commercial real estate involves owning properties used for business functions. They give you opportunities for diversified rental income but still require landlord responsibilities (like residential properties).
• House flipping: Buying, renovating, and quickly selling properties can generate fast profits without long-term management.
• Real estate investment trusts (REITs): REITs allow you to invest in real estate on a large scale. REITs allow you to own shares and receive income and gains from real estate without having to own physical properties.

Source of passive income

You can earn passive income (income that doesn’t require regular, traditional work) from real estate for a variety of purposes, including growing your real estate portfolio, covering monthly expenses, or saving for other financial goals.

• 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.

Tax benefits

Unlike a capital gains tax on real estate that you have to pay, real estate investors can benefit from various tax breaks and deductions, especially if you treat investing as a business. The IRS allows mortgage interest, property depreciation, and business expenses deductions. Also, the 1031 exchange rule lets investors defer capital gains taxes by reinvesting in another property within 180 days. Consult a tax advisor to understand which benefits apply to your situation.

Plus of property appreciation

Real estate typically appreciates over time, boosting investor profits, especially for long-term holdings. For example, a home you purchased 10 years ago for $300,000 might be worth $500,000 today. You can convert any home appreciation to cash flow when you sell your property.

Opportunity to build capital

Investing often involves leveraging mortgage financing, meaning you take out a mortgage loan to pay for your real estate investment. As the property appreciates, you build equity (the amount you own minus what you owe), and capital builds over time.

You can access your equity through selling your real estate or through cash-out refinancing to fund more investments. Cash-out refinancing means replacing your mortgage loan with a new, larger mortgage and utilizing the excess cash. 

Protection from inflation

Real estate tends to keep pace with inflation (inflation is an increase in the price of goods over time), which can possibly protect the investment’s value and purchasing power. Stock market and real estate investors may see benefits from inflation – stock prices generally rise with inflation, and real estate owners might see property values increase when inflation soars.

Ability to finance your property

Unlike some investments, you don’t need full cash upfront to invest in real estate. Investors sometimes finance multiple properties to increase cash flow and benefit from capital gains potential. For example, you might take out a mortgage to buy a rental house, then leverage that investment (such as through a cash-out refinance) to buy a commercial property. Check with your lender to learn about all your potential options.

Generational investment

Real estate can provide more than just passive income for yourself; you can pass it down to heirs and provide long-term family financial stability. Some investors create limited liability corporations (LLCs) to operate properties as family businesses for future generations. LLCs protect you from personal liability so your personal assets aren’t at risk in the case of bankruptcy or lawsuits.

Real estate vs. stocks and bonds

Consider comparing real estate with other investment options before you make investment moves. Stocks require you to have capital to buy shares and tend to be more volatile, with value fluctuating based on market and company performance. Bonds, including mortgage bonds, are less risky and more conservative than stocks but require full upfront investment and generally yield lower returns compared to real estate.

Stocks and bonds differ considerably from real estate, so it’s important to carefully consider how you’d like to structure your portfolio. Many people invest in all three, but it’s important to get professional advice. Consider consulting a financial professional and analyze your risk tolerance before you dive into any new investment.

FAQ

Still have questions? Read on to learn more about some of the most commonly asked questions about investing in real estate.

When can real estate be a good investment?

Real estate can be a good investment if you research the market, know the area, and buy properties you can afford and manage. Consider talking with a real estate agent to learn more about the real estate options in your area.

What are the challenges of investing in real estate?

Risks include property value decline, high capital needs, and time required for maintenance and management. In some cases, real estate is not passive, because you may have to actively work on a property you’ve purchased, particularly if you purchase an apartment building or other high-occupancy investment.

Where can you find an investment property?

Diversifying between real estate and stocks reduces risk, as relying on just one can be too risky. Check with a real estate agent and lender in your area to identify the right type of first investment property for you and the amount you can safely borrow based on your income and assets.

The bottom line: Real estate can be a good investment

Is real estate a good investment? Yes, it can be an excellent addition to your portfolio. Investing in real estate has helped millions of people diversify their income, so you’re in good company. Do your research before you invest and consider the right type of real estate for your needs before you take the plunge.

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