5 Reasons Real Estate Belongs In Your Investment Portfolio
When done the right way, real estate investing provides great returns through rental income, tax advantages and capital appreciation. While I also invest in mutual funds, a large part of my investment portfolio is in real estate. Why?
1. Real estate investments provide cash flow and a hedge against inflation.
You’ve heard it said, “Cash is king.” Whether stock or real estate, your investments should be paying you cash that you can reinvest or save for your retirement. Rental properties give a steady source of cash. Buying the right properties is key, of course.
What’s nice about rental income is that your cash flow keeps pace with inflation. The market price for rental properties automatically rises as the cost of living increases.
You can also line up a big cash payday by buying a “distressed” or foreclosed property below the market value. Then you can fix it up and sell it a few months later for more than what you’ve paid—the purchase price and rehab and transaction costs.
You can choose to “fix and flip” to collect a windfall or hold and rent for monthly cash flow. Either way, investment properties can provide income and a hedge against inflation.
2. Real estate is a market where you can “buy low and sell high”.
Money is made in the stock market by buying low and selling high. The problem is it’s nearly impossible for most investors to do so consistently. Anomalies are quickly adjusted for by institutional investors who have leverage and research teams.
In the real estate market, there are thousands of little markets. You can always find deals and “buy low.” you are dealing with individual properties that differ in location, size, features and other criteria. There is no set market for the exact property you are considering.
3. Actively managed real estate provides better returns and lower risk than stock market investing.
Stock market values go up and down. Independent Research Firm, Dalbar, has been measuring the effects of investor since 1994 and concludes that individual investors tend to buy and sell at precisely the wrong times—which wipes out possible gains in an already efficient market where bargains are sparse.
On the other hand, real estate is nearly immune to emotional buying and selling. You have more facts to make a better investment choice initially when you buy properties. The long-term nature of real estate assets makes panic selling impossible, which ensures you hold on through ups and downs.
Your risk of loss typically goes down the longer you hold real estate. Your equity builds and home prices rise over time. Stock investment risk doesn’t decline over time. All the while, rents and the value of your property goes up thanks to inflation.
4. Real estate investing provides unique tax advantages.
While there are others, depreciation is the tax advantage that most investors have heard about. For dwellings, the IRS allows you to deduct the cost of the property over 27.5 years.
What real estate investors love is that you are depreciating an asset that does not often lose value. In fact, property values tend to go up over time. That means you get a tax credit on the cost of an asset that may be going up in value, not down.
What is more, depreciation is a tax credit that is on top of property upkeep and other costs that you can deduct from rental income.
5. Real estate investors can use leverage to build wealth.
Leverage is a valuable tool you can use to build their portfolio of investment properties. Getting a mortgage to buy a rental property gives you leverage that you can use to invest in more properties (and different types of properties to spread your risk) with less money down.
Say you put 30% down on a $100,000 property. You are controlling an income-producing asset worth more than three times your cash investment. You are earning rent from a $100,000 property when all you invested was $30,000.
I have personally found that real estate provides many advantages over the stock market. You can easily pocket an annual gain of 10% Return on Investment (ROI) from rental income. Your investment provides monthly cash flow, and properties typically go up in value, providing capital appreciation. On top of that, there are tax advantages year after year.
Of course, not all properties make great investments. You can’t just go out and buy just any property. As a real estate investor, it’s crucial that you buy below market value. That means you need to put in the time and effort to find deals and do careful and complete research.
There’s no reason to go it alone…as your buyer’s agent, I’ll represent your interests and help you find good deals and acquire investments that meet your objectives. I’d love to chat with you.