Key Reasons to Invest in Real Estate

by admin on March 31, 2022

Find out why real estate is considered a good investment

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.

Here’s what you need to know about real estate benefits and why real estate is considered a good investment.

KEY TAKEAWAYS

• Real estate investors make money through rental income, appreciation, and profits generated by business activities that depend on the property.
• The benefits of investing in real estate include passive income, stable cash flow, tax advantages, diversification, and leverage.
• Real estate investment trusts (REITs) offer a way to invest in real estate without having to own, operate, or finance properties.

1. Cash Flow : 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. In many cases, cash flow only strengthens over time as you pay down your mortgage—and build up your equity.
2. Tax Breaks and Deductions : Real estate investors can take advantage of numerous tax breaks and deductions that can save money at tax time. In general, you can deduct the reasonable costs of owning, operating, and managing a property.
3. Appreciation : Real estate investors make money through rental income, any profits generated by property-dependent business activity, 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.
4. Build Equity and Wealth : As you pay down a property mortgage, you build equity—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 even more.
5. Portfolio Diversification : Another benefit of investing in real estate is its diversification potential. Real estate has a low and in some cases negative—correlation with other major asset classes. This means the addition of real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk.
6. Real Estate Leverage : Leverage is the use of various financial instruments or borrowed capital (e.g., 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. Because real estate is a tangible asset and one that can serve as collateral, financing is readily available.
7. Competitive Risk-Adjusted Returns : Real estate returns vary, depending on factors such as location, asset class, and management.
8. Inflation Hedge : The inflation hedging capability of real estate stems from the positive relationship between GDP growth and the demand for real estate. As economies expand, the demand for real estate drives rents higher. This, in turn, translates into higher capital values. Therefore, 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.

The Bottom Line

Key Reasons to Invest in Real Estate

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.