Real estate investments are often a great way to earn higher-than-average returns. Moreover, real estate investments also allow you to diversify your portfolio. Some suggest real estate investing, when done appropriately, is the highest-earning asset class a portfolio can have. Let’s look at some of the key reasons to invest in real estate.
What is real estate investing?
Real estate investing refers to the purchase of property as an investment to generate income rather than using it as a primary residence. In simple terms, it can be understood as any land, building, infrastructure and other tangible property which is usually immovable but transferable.
Key reasons to invest in real estate
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. It’s also possible to leverage real estate to build wealth. Thinking about investing in real estate? Here’s what you need to know about real estate benefits and why real estate is considered a good investment.
Steady cash flow
Owning real estate is a way to boost your monthly income. Whether you invest in commercial real estate or residential, you can rent out your space to tenants. You’ll then receive a monthly income in the form of rent checks. In many cases, cash flow only strengthens over time as you pay down your mortgage and build up your equity.
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.
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.
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.
Investment properties bring much-desired passive income, which you don’t have to work for every day. Say you charge rent on a single-family or multifamily property. The rent checks that come in each month are an example of passive income.
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.
Real estate is a long-term investment, meaning you can hold it for several years as you wait for it to appreciate. At the same time, if you rent out your real estate you can earn monthly income while you wait for your property’s value to rise.
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.