Investing in Real Estate

The benefits of investing in real estate are numerous. With well-chosen assets, investors can enjoy predictable cash flow, excellent returns, tax advantages, and diversification—and it is possible to leverage real estate to build wealth. Below are some of the many advantages of investing in real property.

Cash Flow

Cash flow is the net income from a real estate investment after mortgage payments and operating expenses have been made. A key benefit of real estate investing is its ability to generate cash flow. In many cases, cash flow only strengthens over time as you pay down the mortgage and build up your equity.

Tax Breaks and Deductions

Real estate investors should consider the numerous tax breaks and deductions that can save money at tax time. In general, you can deduct the reasonable costs of owning, operating, and managing a property.

Appreciation

Real estate investors make money through rental income, any profits generated by property-dependent business activity, and appreciation. Real estate values tend to increase over time, and with a good investment, you can turn a profit when it comes time to sell. Rents may also rise over time, which can lead to higher cash flow.

Build Equity and Wealth

As you pay down a property mortgage, you build equity—an asset that becomes part of your net worth. And as you build equity, you have the leverage to buy more properties and increase cash flow and wealth even more.

Real Estate Leverage

Leverage is the use of various financial instruments or borrowed capital (e.g., debt) to increase an investment’s potential return. A 20% down payment on a mortgage, for example, gets you 100% of the house you want to buy—that’s leverage.

Hedge Against Inflation

There are several ways that owning real estate can protect against inflation. First, property values may rise higher than the rate of inflation, leading to capital gains. Second, rents on investment properties can increase to keep up with inflation. Finally, properties financed with a fixed-rate loan will see the relative amount of the monthly mortgage payments fall over time — for instance $1,000 a month as a fixed payment will become less burdensome as inflation erodes the purchasing power of that $1,000.

What About My Primary Residence?

Generally, a primary residence is not considered to be a real estate investment since it is used as one’s home. Nevertheless, one can profit from selling their home at a price greater than they paid for it. If this does happen, you may be responsible to pay taxes on those gains.

Despite all the benefits of investing in real estate, there are drawbacks. One of the main ones is the lack of liquidity (or the relative difficulty in converting an asset into cash and cash into an asset). 

Investing in real estate offers cash flow, tax breaks, equity building, competitive risk-adjusted returns, and a hedge against inflation. Real estate can also enhance a portfolio by lowering volatility through diversification. If you are looking to expand or enhance your investment portfolio, real estate definitely deserves strong consideration as a viable option.

 

Debbie Austin is a realtor associate with Keller Williams, Roseville and has been helping clients buy and sell property in the area for 20 years. If you have a specific real estate question you wish to see addressed, contact Debbie at (916) 223-8144 or visit debbieaustinrealty.com.