Investing in real estate is a great move financially. When done correctly, the benefits range from passive income and tax advantages, to portfolio diversification and more. Have you found yourself wondering, “why invest in real estate”? This guide details 5 reasons why investing in real estate is one of the best investments you can make.
Why Invest in Real Estate: Safe Investments
Real estate investing is secured by an asset, that being the property itself. Thus, it’s rare to see this type of investment lose its value. Real estate is a tangible asset, so investors typically don’t have to worry about losing value to inflation, unlike the dollar. Whether residential or commercial real estate, these investments are usually held for a longer period of time. Thus, further protecting the investor from the risk of losing value.
Ultimately, the answer to why invest in real estate for many is because it’s one of the safest investments you can make. Of course, any investment comes with some risk, and home values can fluctuate over time. But real estate is among the safest ways to invest your money for the long term.
Real Estate vs Other Investments
Real Estate Vs. Stocks
Stocks are more volatile than real estate. This means the value of a stock can rise and fall much quicker than a tangible asset like real estate. However, real estate is less liquid than investing in the stock market: it’s easier for an investor to sell stocks and access that money, than it is to sell a rental property.
Real Estate Vs. Bonds
Typically, you don’t lose money by investing in bonds. They are considered a very safe investment. But, the gains from a bond also tend to be relatively small. By investing in real estate, you’re more likely to have higher gains, but at a higher level of relative risky.
Real Estate Vs. Mutual Funds
Similar to most real estate investments, mutual funds are considered a long-term investment. By holding onto your mutual fund investment for a longer period of time, its value will typically increase. However, appreciation isn’t always a certainty. Similar to stocks, mutual funds offer an easier option for investing that provides higher liquidity.
However, real estate investments are likely to weather an economic downturn better than a mutual fund. While the housing bubble of 2008 may come to mind in this instance, with the cycle of the economy, property values fluctuate. Ultimately, by holding your property investment for a longer period of time, real estate sees an increase in value. With that, there are ways for investors to further protect themselves from economic downturn. For example, purchasing a property in a high demand area or low supply location.
Appreciation Over Time
Investing in real estate provides an asset that not only naturally appreciates, but over time allows for forced appreciation. Forced appreciation is the revenue made from the money you put into the asset. For example, renovating the kitchen and finishing the basement of your investment property raises its value and eventual sales price.
Some real estate investors focus more heavily on adding value, such as house flipping. This is a unique form of real estate investing, in that it is typically a short term rather than long term investment.
As you make renovations and upgrades to your property, you may also see an increase in property taxes. However, renovations in turn allow you to increase the property’s rent. With that, you also increase your cash flow.
Tax advantages of investing in real estate
As we discussed, with increased value comes increased property taxes. But, investing in real estate offers a variety of tax benefits that make it an attractive addition to your portfolio. Multiple expenses associated with property management and owning investment properties are eligible for deduction.
Property taxes and property management fees, costs associated with maintenance and upkeep, insurance, interest within your mortgage payments, and even the costs of marketing a property are all deductible from your taxes.
It’s important to note, when you sell the given property, the gain on your investment will be taxed as capital gains. Typically, capital gains are taxed at a lower rate than income. In some circumstances, there are ways to defer capital gains. A 1031 exchange is an option for investors who sell a property, then reinvest the proceeds from the sale within a specific time period.
Why invest in real estate: Passive Income
Real estate is one of the best investments for passive income. Whether you’re part of a real estate investment trust, a sole owner or part of an investment group, passive income is often the most common goal of an investor. There are a variety of ways to generate passive income through real estate. Generally, most involve a property manager to do much of the grunt work.
With research and an expert team, real estate investing can result in some of the highest returns year over year. It is considered one of the highest performing asset classes available. For many, financial freedom means the ability to spend their time as they please. Often, investors choose real estate for the opportunity to create passive income, since with it, early retirement becomes more accessible.
Passive income for generations
Passive income in real estate also provides investors with a tangible asset to pass down through generations. As the value of a real estate investment increases over time, many people choose to leave property in their will for family members. As a result, the investor is able to defer taxes on behalf of the family member receiving the property.
Real Estate Investing: Depreciation and Deductions
An important part of real estate investing is understanding what benefits and deductions you are eligible for. This ensures you aren’t leaving money on the table.
When you own a real estate investment that you also live in, your tax deductions are limited. For example, house hacking is a great way to get started in real estate investing, but it doesn’t provide you with many tax benefits.
Why invest in real estate? Well, when you buy an investment property and rent it out, you are operating a business. As a result, investors are eligible for deductions as a business owner rather than a homeowner. Any expenses the investor has from property maintenance, or conducting business are eligible for a tax write off. As a result, tax liability is decreased, and profit is increased.
Owning investment property also means being aware of how the cost of property purchases and improvements can be depreciated over time. Depreciation is the process of deducting the cost of buying and/or improving rental property throughout the period of its useful life.
For example, the value of a building can be depreciated, but the value of land cannot.
Specifically, investing in rental property offers unique opportunities for depreciation. On top of rental income, these properties provide equity over time, while providing opportunities for depreciation to decrease expenses and tax liability overall.
In order to depreciate a property, if must meet the following requirements:
- Property you own
- Property you use as an income-producing activity. For example, in your personal business.
- The owned property has a determinable useful life. This means the property gets used, decays and becomes obsolete, or loses its value from natural causes.
Why Invest in Real Estate: The Bottom Line
Investing in real estate creates opportunity for tax breaks, passive income and ultimately financial freedom. It’s essential to do your research as you consider why investing in real estate is right for you. A key part of this research is choosing the right, investor friendly real estate agent.
Your agent can offer you access to the MLS, as well as a network of off-market or pre-market listings that may result in an off market deal. An expert real estate agent understands that the details of a property affect your bottom line and can ensure properties meet your desired cap rate. Consider asking a few key questions to ensure you pick the right agent for your investing needs.
Speak with an expert Trelora agent today to learn how you can save thousands of dollars when you buy or sell an investment property. Our agents close hundreds of deals each year. So, you can feel confident diversifying your portfolio, completing a 1031 exchange, or simply building your investment team with an expert on your side.
Christina Parker co-founded Trelora’s North Carolina branch in 2020 and has successfully closed 330 deals as an agent. She was promoted to Market Director in 2021 as Trelora expanded to serve homeowners in Charlotte in addition to their hub in Raleigh.