If you do a search on the internet for the phrase ‘benefits of investing in real estate, you will find nearly 180,000,000 results.
Many people are interested in investing in real estate today, and who can blame them?
With everything that’s happening in the world today, it’s no wonder why so many investors are looking to invest in real estate instead of a stock market that can go from bull to bear in the blink of an eye.
The following are 12 reasons why so many people today consider real estate to be the best investment:
Monthly passive income
Renting out property generates a lot more passive income than stocks with dividends. The only time you have to spend on your investment when you invest in a turnkey rental property and hire a local property manager to handle the daily details is to review your manager’s performance monthly and deposit your monthly profits.
Increased equity from appreciation
U.S. home prices have been steadily rising since 1965, with only one minor correction in 2008 when the Global Financial Crisis struck. In the last 20 years, the median sales price of houses has increased from $165,300 to $327,100 (as of Q1 2020), an increase of nearly 98%.
Use leverage to boost returns
Investing in rental properties at a conservative LTV of 75% (25% down payment, 75% mortgage) is a popular strategy for growing a rental portfolio, exponentially increasing cash flow. With leverage, you can use OPM (other people’s money) to boost your ROI and cash-on-cash returns year after year.
Direct control of investments
You put your money in the hands of people you don’t know when you invest in the stock market. ETF managers, mutual fund managers, and REIT managers don’t know who you are either and may be more concerned about their own take-home pay than yours. When you invest in real estate, however, you have complete control over how, when, and where you invest.
Hedge against stock market volatility
There is only about a 40% correlation between real estate and stocks during a bear market, according to a recent MarketWatch article. Assets with low correlations are less likely to rise and fall at the same time, which is why real estate is often touted as a hedge against stock market volatility.
Historically, real estate has also been a hedge against inflation as well as a hedge against a bear stock market. Over the last 20 years, the overall inflation rate has been 37.4%, while home prices have increased by nearly 98%.
Real estate investors benefit from more than just an increase in market value. Rent increases of 3% or more are the norm in most markets, helping to keep rental income cash flows in line with inflation.
Deductible business expenses
Expenses related to owning real estate, such as leasing and management fees, repairs and maintenance, property taxes, and mortgage interest, are fully deductible. Using conservative leverage, the right rental property can be purchased so that tenant rents cover the operating expenses while leaving extra money as net income.
Tax benefits like depreciation
Real estate investors can reduce their taxable income by deducting non-cash depreciation. Over the course of 27.5 years, you can deduct 3.636% of the value of your property (excluding the land) from your taxable income. Many real estate investors are extremely wealthy while paying virtually no income tax because of depreciation.
Section 1031 ex-changes to defer capital gains taxes
Investing in real estate is particularly tax-friendly in the U.S. Besides deducting your business operating expenses and claiming depreciation to lower your taxable net income, you can also conduct a Section 1031 exchange to defer capital gains tax.
By using a 1031 exchange to sell one investment property and replace it with another, you can gain additional capital to invest in real estate instead of giving it to the government.
Self-directed IRA for real estate
The average retirement plan balance for families in the top 50% income bracket ranges from almost $250,000 to about $650,000, according to the Federal Reserve. Taking control of their savings is easy in light of how the stock market is currently acting. You can invest in real estate using a self-directed IRA and still retain the tax benefits of a traditional IRA or 401(k).
Invest when and where you want
Real estate investing is a numbers game. The more offers you make, the greater the likelihood that a seller will accept yours. In addition, the more thoroughly you analyze potential deals, the better your property will perform financially.
When you have a strategy to follow and a goal in mind, picking and choosing is easier. Even though you shouldn’t let ‘analysis paralysis’ overwhelm you, you shouldn’t choose the first deal you come across. Take advantage of opportunities that make sense instead of rushing into a deal.
Build your own business
A major advantage of the real estate business is its low entry barrier. With this business, you don’t have to waste money on a storefront, salaried employees, or inventory that doesn’t produce income until it’s sold.
Real estate investing with just $20K (or even less) is possible in at least 8 ways. You will also be giving back to the communities where you work as you build your own real estate company.
Employing local contractors and property managers boosts the economy, rental properties provide desperately needed housing in the community, and becoming involved in charities is a great way to reach out to the community.