Entrepreneurs and savvy savers alike are looking for ways to diversify profits and wealth that go beyond savings accounts, stocks and other traditional investments. For those that take the time to look carefully at all options, the investment of choice often turns out to be real estate, one of the best ways to build long-term wealth. So what are the perks of investing in real estate? Here are 6 reasons this is one bandwagon worth climbing on.
1. Cash Flow:
Investing in real estate provides ongoing cash flow each month, relatively passive income that is left over after bills are paid. This cash flow provides some investors with the freedom to spend time engaged in leisure, business-building or re-investing in more real estate. Unlike other business investments, whose profits are often unstable and unpredictable, the income a real estate investment provides is relatively predictable. Even better, as a result of depreciation and mortgage interest tax deductions the cash flow from rental income is usually tax-free until capital gains tax is paid at the time of sale in the future.
2. Tax Benefits:
It is unwise to purchase rental property based on speculations of value since that puts the cash flow benefit at risk. It is reasonable, however, to assume some long-term appreciation, and the benefits of tax deferment are a primary consideration. Down the road it is often possible to further reduce tax liability with a 1031 exchange, charitable trust or installment sale.
3. The Pay Down of the Loan:
In essence, a rental property for which the tenant’s rent payment covers at least the mortgage amount acts as a savings account with automatic growth, with the equity accumulated increasing the property owner’s net worth each month even as the loan is paid down.
When you buy a rental property using a mortgage, your tenant is actually the one paying the mortgage payment, thus increasing your net worth each month. Because of the loan pay down a rental property is essentially a savings account that grows automatically, without you depositing money each month. If the property is consistently occupied then by the end of the term of the loan the property owner holds a significant asset into which he or she has paid comparatively very little.
In most cases the value of the real estate will have increased from the time of purchase to the end of the term of the loan. While recessions and other market changes, as well as the state of the market when the purchase was made, do mean that it is conceivable that the property can decrease in value, over time values will almost certainly increase. This makes appreciation a reasonable assumption on long-term real estate investments.
5. Protection Against Inflation:
The reality of inflation means that significant price increases on groceries and other goods are always ahead. For investors who hold real estate this is good news for business. While property values and rent prices will also increase as a result of inflation, the cost and amount of the mortgage on a property will remain the same, resulting in a greater amount of monthly cash flow or a mortgage that is paid off more quickly.
6. Investing Other People’s Money:
Purchasing real estate as an investment using a mortgage is one of the only ways to use someone else’s money on an investment that the buyer is likely to see the most significant return on. Sometimes the structure of a deal can even be arranged in a way that eliminates the need to put any of the purchaser’s own money down. While stocks or precious metals can be excellent investments in some instances, no one is going to receive a loan to invest in either of those with 30 year fixed rate repayment terms. Only real estate can offer that.
To talk more about real estate investments and how to protect them, please contact us. Thank you.