If you do an internet search using the phrase ‘Benefits of investing in real estate’ you’ll find nearly 180,000,000 results.
Clearly, there are a lot of people interested in investing in real estate today, and who can blame them?
Given everything that’s going on in the world today, it’s easy to understand why so many investors are looking at putting money into real property instead of a stock market that can change from bull to bear and back again at the blink of an eye.
Here are 12 of the biggest reasons why so many people today consider real estate to be the best investment around:
1. Monthly passive income
Monthly passive income is similar to dividend-paying stocks, except with rental real estate there’s a lot more cash flow. When you invest in turnkey rental property and hire a local property manager to handle the daily details, the time you have to spend on the investment is limited to monthly performance reviews with your manager – and depositing your monthly profits.
2. Increased equity from appreciation
Since 1965 home prices in the U.S. have been steadily rising, with only one minor correction in 2008 when the Global Financial Crisis hit. According to the Federal Reserve, since Q1 2000, the median sales price of houses have grown from $165,300 to $327,100 (as of Q1 2020), an increase of nearly 98% over the past 20 years.
3. Use leverage to boost returns
Many real estate investors use a conservative LTV of 75% (25% down payment and 75% mortgage) to exponentially increase cash flows and diversify and grow a rental property portfolio. Leverage lets you use OPM (other people’s money) to boost ROI and cash-on-cash returns that increase your wealth year after year.
4. Direct control of investments
When you invest in the stock market, you’re putting money in the hands of people you don’t know. Managers of ETFs, mutual funds, and REITs don’t know who you are either, and may be more concerned about their take-home pay than your best interests. On the other hand, investing in real estate gives you complete control over how, when, and where to invest.
5. Hedge against stock market volatility
A recent article in MarketWatch noted that there’s only about a 40% correlation between real estate and stocks during a bear market. When assets have a low correlation they’re less likely to go up and down at the same time, which is one real estate is often touted as a hedge against volatility in the stock market.
6. Inflation hedge
In addition to being a hedge against a bear stock market, real estate is also an historic hedge against inflation. While the total inflation rate over the last 20 years has been about 37.4%, home prices have increased by nearly 98% over the same time period.
It’s not only the increase in market values that real estate investors benefit from. In most markets, annual rent increases of 3% or more are the norm, helping to keep rental income cash flows in line with the annual rate of inflation.
7. Deductible business expenses
Costs of owning real estate – including items such as leasing and management fees, repairs and maintenance, property taxes and mortgage interest expense – are fully deductible. When the right rental property is purchased using conservative leverage, monthly cash flow from the tenant pays for these operating expenses while leaving extra money left over as net income.
8. Tax benefits like depreciation
The IRS lets real estate investors reduce their taxable income with a non-cash depreciation deduction. Over the course of 27.5 years you can deduct 3.636% of the value of your property (excluding the land) from your net income subject to tax. Depreciation is one reason why a lot of real estate investors are very wealthy while paying next to nothing in income tax.
9. Section 1031 exchange to defer capital gains tax
Tax law in the U.S. is especially friendly to real estate investors. In addition to deducting your business operating expenses and using depreciation to lower your taxable net income, you can also conduct a Section 1031 exchange to defer paying capital gains tax.
By using a 1031 to relinquish one investment property and replace it with another, you’ll have additional capital to invest in real estate instead of giving your money to the government.
10. Self-directed IRA for real estate
According to the Federal Reserve, the average retirement plan balance for families in the top 50% income bracket range from almost $250,000 to about $650,000. With the way the stock market is acting today, it’s easy to understand why more investors want to take control of their savings. By setting up a self-directed IRA, you can use your retirement plan to invest in real estate while still retaining the same tax advantages found in traditional IRAs and 401(k)s.
11. Invest when and where you want
Investing in real estate is a numbers game. The more offers you make, the greater the odds are of finding a seller that accepts. And the more thoroughly you analyze potential deals, the better the financial performance of your property will be.
It’s easier to pick and choose when you have an investing strategy to follow and an end-game in mind. While you shouldn’t fall victim to ‘analysis paralysis’ there’s also no reason to jump at the first deal that comes along. Instead, wait for an opportunity that makes sense, then seize the day by sealing the deal.
12. Build your own business
The real estate business has one of the lowest barriers to entry. It’s one of the easiest businesses to get into without having to waste a lot of money on a storefront, salaried employees, or inventory that doesn’t produce income until it's sold.
In fact, there are at least 8 ways to invest in real estate with $20K (or even less). Plus, as you build your own real estate business you’ll be giving back to the communities you work in.
Hiring local contractors and property managers boosts the economy, rental property provides badly needed housing for the community, and getting actively involved in charities is a great way to let people know who you are and what you do.
Potential Downsides of Real Estate Investing
There are downsides to everything, and real estate is no exception. However, the most successful real estate investors know that something isn’t a problem if a solution can be found.
In the interest of fair play, here are some of the potential downsides of real estate investment, and how you can turn these potential obstacles into opportunities by planning ahead:Real estate lacks liquidity
- Problem: Can’t sell real estate with a push of a button like stocks and bonds
- Solution: Using conservative leverage can help keep equity levels up that provide a potential source for cash when and if you need it
- Problem: Holding for the long-term can be difficult for some investors
- Solution: While it’s true that investors with a buy-and-hold strategy generally see the best returns, allocating only a portion of your investment capital to real estate leaves fund free for other uses
- Problem: Renting to a tenant who knows how to ‘work the system’
- Solution: Using experienced local property managers who understand the market and the local real estate laws can help protect rental property investors from ‘professional tenants’ who are looking for their next victim
- Problem: Buying the wrong property at the wrong time for the wrong reasons
- Solution: Paying attention to real estate cycles phases, using an LLC to protect personal and business assets, and financing with a conservative LTV can help reduce the risk of losing money in real estate
- Problem: Analysis paralysis from the fear of making the first investment
- Solution: Learning the financial metrics to identify good deals and investing in turnkey rental property can make doing your first real estate deal much, much easier
Anyone Can Be a Real Estate Investor
The fact is that anyone can invest in real estate and reap the almost endless benefits and rewards that income-producing property offers.
You’ve got to have an optimistic attitude, develop a system for investing that matches your investment objectives, and be prepared to turn potential challenges into opportunities. Doing this helps to generate profits that are more robust and predictable as you scale up and grow your real estate portfolio.
- Select an investment niche that’s easy to get started in, such as turnkey single-family rental houses and smaller multi-family property.
- Understand the various ways to finance real estate by researching options such as conventional loans, private equity, partnerships, and blanket mortgages as your portfolio grows.
- Choosing property that generates a steady monthly cash flow lets you use the tenant’s monthly rent to pay your operating expenses and mortgage payment, while long-term appreciation helps to boost your total returns.