Real estate is a popular wealth-building vehicle amongst many of today’s greatest investors, and for good reason: it has been known to award savvy individuals with an impressive return on investment (ROI).
Few investment opportunities can match the rate of return typically witnessed in a properly vetted real estate deal. That said, real estate is far from the only investment strategy capable of realizing attractive returns. Stocks, bonds, investment funds and options have helped investors make money since their inception, which begs the question: Why invest in real estate? What sets real estate investments apart from the rest of today’s wealth-building strategies? In addition to attractive returns, why is real estate a good investment? Continue reading to learn why real estate may be the best investing option for you.
Most people choose real estate over other investment vehicles because real estate investing has become synonymous with an excellent rate of return. However, impressive returns are far from the only reason investors are interested in the industry. Below is a list of the most desirable benefits that come with investing in a real estate:
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Return on investment (ROI) is arguably the most important consideration when debating whether or not to invest in real estate. Investors are in the business of making money; or, as Merriam-Webster defines it, investing is the act of committing money in order to earn a financial return. Not surprisingly, real estate has developed a reputation for doing just that. Historically, real estate investing has resulted in attractive returns, both in the form of appreciation and impressive profit margins.
The last year, in particular, has proven to be lucrative for those actively participating in the housing market. In the first quarter of 2018, real estate investors became the beneficiaries of an “all-time high average gross flipping profit of $68,000,” according to Attom Data Solutions’ most recent Home Flipping Report. Note that 2018 wasn’t simply a fleeting trend, but rather the exclamation point at the end of what has already been (and should continue to be) a positive run for real estate investors. For the better part of a decade, home flipping profits have been on the rise.
Those looking at real estate as a more long-term investment should take solace in the fact that the housing market has demonstrated a propensity for long-term appreciation, too. While appreciation isn’t guaranteed, home values have proven they will increase more often than not. According to the U.S. Census Bureau, in 1940, the median home value in the U.S. was just $2,938. In 1980, it was $47,200, and by 2000, it had risen to $119,600. Today, the median home value across the United States is nearly double what it was nearly two decades ago.
Real estate awards its holders the ability to diversify in one of two ways. For starters, real estate may be added to a portfolio void of physical assets. It is also worth pointing out that real estate assets are varied enough to allow investors to diversify even within a single industry. A real estate investment portfolio may consist entirely of real estate assets, but the buildings themselves may house a diverse group of industries. Passive income real estate investors who collect commercial properties might own a shopping center with everything from a grocery store to a movie theater. This means, diversifying a real estate portfolio can be as simple as carefully vetting your own tenants. When diversifying the tenants in each of your holdings, you are mitigating the risk of a single downturn disrupting your cash flow.
Those who are less inclined to invest in long-term rentals can diversify their investments between different exit strategies. In addition to acting as a landlord, investors can choose to wholesale and flip properties.
Lastly, today’s entrepreneurs can diversify their portfolios with profitable assets in both up and down markets. In an appreciating real estate market, for example, it’s often better to invest in rental properties. That way, investors can rent out their assets to offset increased acquisition costs. In a depreciating market, investors may want to focus their efforts on flips, as acquisition costs can lead to attractive profit margins.
Fortunately, real estate investors can diversify their own holdings in order to account for current market conditions and place themselves in the best positions to realize success.
The same diversity that allows real estate investors to mitigate risk and diversify their portfolios also awards investors the opportunity to choose their own path and make their own schedules.
There are a number of ways to make money in the real estate industry, and investors are able to pick the option that best suits not only their goals best, but also their investing style. This means investors can choose between any of the most popular exit strategies: wholesaling, flipping and rental properties. Not only that, but they can choose to execute each strategy to their own liking and on their own schedule, ultimately allowing them to spend their time how they want to.
Most people invest in real estate for the profit margins, but there’s one reason fewer people are aware of: tax benefits. At the very least, real estate may act as a tax shelter; one that reduces your taxable income and increases the amount you are able to save each year. Via some incredible deductions, real estate tax benefits can significantly reduce the amount you are expected to pay back to the government, resulting in profits.
Whether you already own rental property, or you are considering breaking into the industry, you need to familiarize yourself with the tax benefits of rental property ownership. Here are some of the most important tax deductions to be aware of:
To be clear, rental property owners are not allowed to deduct every dollar they spend on an asset. There are rules to abide by, not the least of which the I.R.S. describe as ordinary and necessary. According to the I.R.S. website, “You can deduct the ordinary and necessary expenses for managing, conserving and maintaining your rental property. Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities and insurance.”
Depreciation is perhaps the most underrated real estate tax deduction. In fact, investment property depreciation is a significant tax benefit that allows rental property owners to deduct the costs associated with buying a respective home. Instead of taking place over the course of a single year, rental property depreciation takes place over the predetermined useful life of a single-family home (which the I.R.S. has deemed to be 27.5 years.) As a result, homeowners may write off a portion of the home’s acquisition cost for nearly three decades.
One of the primary reasons many people have taken to the real estate investing industry is the sheer volume of available financing options. In addition to institutionalized lenders, there are countless private and hard money lenders looking to lend aspiring real estate investors a hand. In fact, it is entirely possible to invest in real estate with other people’s money—so long as you know where to look.
It is worth noting, however, that private and hard money loans come with a steep price tag. Whereas traditional 30-year fixed-rate loans currently coincide with an interest rate somewhere in the neighborhood of 4.6 percent, hard money and private money loans can cost investors upwards of 12 to 15 percent interest. That said, the added fee comes with some significant benefits of its own; namely, speed of implementation and shorter loan periods. While interest may be higher, it’s typically only accumulated over the course of a few months, whereas traditions mortgages can last as long as 30 years.
On top of that, hard money loans can often be had in as little as a few days. Therein lies the greatest benefit of quick financing options: the speed of implementation is often responsible for actually landing a respective deal. In lining up financing in as little as a few days, investors are more likely to make enticing offers to sellers.
While not the only investment strategy capable of realizing an impressive rate of return, real estate has become the preferred wealth-building vehicle for many of today’s investors. That’s because—in addition to attractive profit margins—real estate can simultaneously award investors a chance to mitigate risk, take advantage of significant tax breaks, and exercise any exit strategy of their liking. By offering more than the opportunity to make a profit, real estate investing has separated itself from other less impressive investing strategies and confirmed it deserves your attention.