Andrew Carnegie once said that 90% of millionaires in America made their fortune from investing in real estate. That may have been true nearly a century ago, but how much does real estate play a role in the creation of wealth in the 21st century? In this article we take a look at real estate as a viable investment channel, and we mention 5 unique benefits that any modern investor will appreciate.
Why Invest in Real Estate?
By putting money in real estate, and selecting your assets wisely, you stand to enjoy a number of benefits including stable cash flow, above-average returns, tax advantages, and of course, a chance to diversify your investment portfolio. Over a period of time, you can expand your wealth by leveraging your real estate assets to raise cash. So why invest in real estate? Because it’s one proven method of getting rich.
Here are Five Benefits of Investing in Real Estate
- Cash Flow
In real estate, Cash Flow is described as the net income from your investment after all the usual expenses and payments have been deducted. Things like operating expenses and mortgage payments take up a significant chunk of your money, but not to the extent that you won’t have cash flow. Real estate makes it possible to generate and increase cash flow over time because the longer you pay your mortgage, the more your equity grows.
- Tax Breaks
As a real estate investor, you most likely will be eligible for tax breaks and discounts, and this will allow you to save a lot of money over time. Generally speaking, this means you may be able to deduct some of the costs of owning, maintaining and managing your property. Remember, the cost of purchasing property is normally depreciated as its useful life expires, (39 years for commercial real estate and 27 years for residential real estate). This can make it possible to reduce your tax obligations by reducing your registered tax income.
Another way to reduce your tax obligations in real estate is by taking advantage of a 1031 exchange.
- Increasing Property Value
There are a few different ways that real estate investors make money. These include rental units, business activity, and appreciation. Keep in mind that the value of your property is likely to increase over time, and if you pick a really good investment, you may be able to get a huge profit when the market turns, and it comes time to sell. For rental units, the increase in rent over time also creates significant gains, but this is not comparable to “flipping” property, which usually gives you a better chance of making a big profit.
- Build Your Equity “Net Worth”
As you go on making payments on your mortgage, it allows you to build equity, which will go toward increasing your net worth. The more you build this equity, the more power you have to take out loans, and make other investments. The important thing is to know how to use your real estate investment as leverage to borrow capital, because this is what will allow you to increase the potential returns to your investments. Most financiers see property as a secure asset that can serve as collateral, which means that under normal circumstances they will be ready to offer financing.
- Inflation Hedge
Real estate value tends to have a close link with GDP, and in cases where the economy shows signs of growth, the demand for real estate increases as well. This demand leads to higher rent, an increase in the number of people buying property (which means home prices shoot up), and with higher capital value, your investment will generate more revenue. Therefore, you can expect your investment to pass the pressures of inflation to your tenants and buyers, should you choose to sell property. Ultimately, you will have better capital appreciation if the economy moves in the right direction, and consumers remain optimistic about the future.
There are many benefits to real estate; however, for those looking to make long-term investments, take your time to understand how the market operates, and which factors influence the capital value. Also take a look at some of the drawbacks, such as the lack of liquidity. Stocks and bonds can be turned into quick cash relatively easy, but it’s rather different with real estate. It takes weeks and months of paperwork and help from a real estate agent to find a serious buyer, so it’s worth doing some homework to make sure you understand this type of asset and the risks it may present.