5 Reasons You Should Invest In Real Estate
Real estate investing can help you generate income, provide tax benefits, grow your wealth and help you diversify your overall investment profile.
When considering paths to wealth and financial freedom, most will at least consider real estate investing. Many would-be investors have bought (and read) the books, listened to the podcasts, read the blogs, watched the videos, and attended the seminars and conferences. But why should you invest in real estate?
Over time, real estate prices tend to appreciate (or go up). This is not to say that those prices always go up. In fact, real estate prices are just like prices for other assets, they can fluctuate over time. Sometimes those fluctuations can be pronounced, as they were after the last real estate market bubble, when housing prices in some parts of the country plunged 45% -55% or more.
Aside from those major market 'dislocations', however, over time, real estate prices generally appreciate. Even owning real estate through those difficult times, however, would have proven better for your wealth than not owning real estate during the same time.
Yes, there are exceptions. If you were an 'owner' and lost your real estate (short sale or foreclosure) due to the dislocations and an inability to afford your real estate, you were not necessarily better off. But if you owned real estate going into the recession, continued to buy during the recession and have continued to own, you will have dramatically grown your wealth.
Hedge Against Inflation
Most Americans have not seen 'real' inflation in their lifetimes. In fact, not since the presidencies of Nixon and Carter have Americans experienced inflation remotely similar to at we are experiencing today. When prices rise dramatically and your money buys less and less, only real estate may provide a reliable hedge against the value destruction inflation creates.
When you purchase real estate, your purchase price and loan amount are known amounts and will not change. The property you purchased for that price, with that loan, however, will likely appreciate over time and, along with that appreciation, the property may very well earn more income (from rents). As well, during the time you own the property, you still maintain the benefits of deductions (for interest, depreciation and certain expenditures on your property).
As the income from the property contributes to paying down the loan, while the value of the property is very likely also appreciating, you are gaining the most advantage you're likely to gain in the battle against inflation. As well, while the property is appreciating, rents will likely also grow - which also helps insulate you from the effects of inflation.
Generate Cash Flow
When you own real estate that generates stable rental income, and you have financed the property effectively, you can count on consistent cash flow that can help you buy other property, pay down your real estate debts and cover expenses. With tenants paying you, even when you are not actively working, you are still getting paid. This is the beauty of passive income.
Generating cash flow, however, requires effective financing. Putting down enough cash that your mortgage can be easily covered from your rents, with cash left over to 'flow' into your accounts. While most investors will look at numbers like the capitalization rate (or "cap rate") or the multiple of annual gross revenue (AGR) to price, they are all coming up with metrics to measure the extent to which the property's income will cover its expenses, with money left over.
A final consideration regarding income and cash flow is that - as long as you carefully control your expenses (even keeping them 'constant' to the extent possible, over time), the more cash flow you can generate the longer you hold the asset, as the financing costs are paid down. Real estate's ability to contribute significant cashflow for investors is one of the most important reasons you should be investing in real estate.
Gain On Appreciating Assets
Besides generating cashflow (increasingly, as your renters pay down your financed balances), real estate assets that tend to appreciate (as we discussed above) will provide with you strong capital gains over time.
When looking at the index of housing prices for the United States over the last 40 years or so, it is clear that housing, as a sample real estate class, can provide massive gains for rel estate investors.
The tax benefits are often overlooked by investors that are just getting started with real estate. The tax code is written to benefit real estate investors and owners by offering them many tax breaks to incentivize ownership.
The obvious tax benefit of owning real estate is the straight line depreciation used to depreciate the property in equal amounts over its' lifespan (30 years traditionally for real estate). This allows you to deduct the determined amount each year, which can offset against any cashflow that your investment property brings in.
The lesser known tax benefit to investing in real estate can be taken advantage of in the first year. If you perform a cost segregation study on a property you recently bought, you can deduct sometimes up to 40% of the value of a property in the first tax year. Now, this won't always be the case and is starting to phase out starting in 2023 so act quick.
Even with cost segregation starting to phase out of the tax code, the tax benefits of real estate can often be enough to completely offset any cashflow you bring in from the property and allows you tax-free income.
No Get Rich Quick Schemes
Investors can, and do, make money across a wide variety of asset classes. There are no (or at least very few) 'get rich quick' schemes for investors. Yes, it is possible to hit a lucky spot, whether it's in stocks or real estate or tech IPOs or cryptocurrency. More often though, investors get rich by consistently taking action and making investments that perform.
While stocks, bonds, commodities, cryptocurrencies and other asset classes can be 'investments' (or 'speculation'), real estate can provide a consistent, predictable and repeatable path to growing great wealth.
Holding an appreciating asset that is being paid for by others (through their payment of rents) is one of the surest ways to consistently and reliably build wealth.