Many people are interested in real estate investment, but the process can be intimidating. It is possible to invest in both commercial and residential real estate, though the knowledge base required to succeed in each field is different. David Ebrahimzadeh lists the top 9 reasons to become involved in real estate investment and how it can be a profitable enterprise.
When real estate is involved, investors will likely enjoy a predictable cash flow. Cash flow represents the net income after the mortgage has been paid and the operating expenses have been accounted for. Cash flow can strengthen over time as your mortgage is paid down and your equity increases.
Real estate investors have vast numbers of tax deductions and tax breaks that can help them save money. Investors can deduct costs related to managing, operating, and owning a property. You can depreciate the costs of the buildings on your property, but not the land.
Depreciating the cost of an investment over its lifetime can add up to decades of deductions. You may even be able to defer your capital gains on your taxes.
Investors may make extra cash flow and rental income, but appreciation is another important benefit of real estate investment. Since values generally rise over time, property is a good long-term investment. Rents also rise over time. Even during recessions, the depression in prices is short-lived and home prices generally rebound within a handful of years.
Paying down a property mortgage allows you to build equity. This asset becomes a significant portion of your net worth. Building equity gives you leverage to invest in more properties, benefiting from each one.
When buyers have equity in a property, they can also access lines of credit that they can use to improve their building. This line of credit is secured against the value of the home, but in most cases, it is a good deal for homeowners and investors.
A real estate investment can be an important aspect of diversifying your entire portfolio. Real estate is generally not correlated with other asset classes. This means that adding real estate to a diversified portfolio can bring you higher returns and lower risks.
Using borrowed capital can increase the potential return on investment. Making a 20 percent down payment gets 100 percent of the house you want. This is where leverage comes in. Since real estate is tangible and can serve as collateral, it is easy to find financing.
When most people consider “beating the market,” they look at the S&P 500’s annual returns. The average annual growth rate of the S&P 500 is about 11 percent. It is possible to make more money on real estate with a stable investment and continued positive cash flow.
Real estate returns may vary, but generally, it is a better investment than many other forms of capital. Investing in a business or in a particular stock could lead to losses even if you research the situation carefully before you put in any money. Real estate tends to be a more reliable form of investment, though of course there are always exceptions in the real world.
Real estate tends to be inflation-proof because GDP growth and real estate demand are positively related. As the economy expands and does well, demand for real estate rises and rents go higher as well. Higher capital values are the result. Real estate maintains its buying power and passes inflation onto tenants.
If investing in real estate sounds good to you but you are not ready to buy and sell individual properties, you could choose a real estate investment trust (REIT). Publicly traded REITs are available through the stock exchanges. High-value trades lead to the ability to enter and leave the market quickly. REITs offer high dividends when compare to traditional stocks.
Despite the benefits shown above, real estate can sometimes be a risky investment. Real estate is not a liquid investment, meaning that unloading a property can be difficult when you want to have cash on hand. Real estate transactions could take months, as opposed to minutes for a stock transaction.
Real estate investment is easier to understand than stocks. It is an area where individual homeowners may find it easier to enter, whether through buying homes to flip them or investing in rental property. The advantages of investing in real estate outweigh the disadvantages, especially where the rate of return is calculated.As a real estate investor, David Ebrahimzadeh points toward the success of these investments as an example for those who want to enter the market.