Are you wondering whether you should invest in real estate? Although you hear people talk about it and it sounds like a good idea, you might have questions about whether it’s a smart investment decision.
Let’s take a look at the reasons why investing in real estate is a good idea for your future.
Rental Property Provides Cash Flow
Many investors use real estate for the cash flow possibilities. Cash flow is the income left over after mortgage payments and operating expenses are paid for.
Rental properties are an excellent way to achieve cash flow. An advantage here is that cash flow continues to increase over the long haul. The reason for this is because inflation generally causes rents to increase each year while your mortgage payments stay the same. Your cash flow will rise substantially once your loan is paid off.
Another way to use real estate for cash flow is taking advantage of how popular Airbnb has become. Simply list your home with Airbnb and benefit from the cash flow each time you provide short-term renters a place to stay.
Real Estate & Leverage
When you use a mortgage to lower the amount of cash needed to purchase property, you’re taking advantage of leverage.
As your property builds equity, it provides two more opportunities to use leverage. First, you might decide to refinance the loan in order to access the equity that exists above the original loan amount. Second, you can take out a second mortgage against that new equity.
In either case, you’ve used leverage to access freed up cash and used it to go buy more property.
Benefit From Appreciation
Over the long-term, real estate has proven to appreciate in value. While there will be short-term ups and downs, of course, holding investment rental property is generally profitable from an appreciation standpoint.
Follow What the Wealthy do
If one of your goals is to become wealthy, then get serious about real estate investing. Many of the world’s wealthiest people take business income and invest it into real estate. In fact, a recent report shows that wealthy people are ignoring the stock market in favor of real estate investments.
Real Estate Creates Equity
Combine the general long-term rise of real estate prices with the fact that you’re slowly paying down your mortgage, another benefit to real estate reveals itself. This is the equity buildup that results as the mortgage principle amount is paid off.
Benefit at Retirement Age
If you get started investing in real estate at a young age, you have the potential to benefit in a big way at retirement age. In the beginning, your cash flow on each property is relatively low. This is because most of the rental income is being used to pay your mortgage, taxes and insurance.
However, if you buy during your main working years, your mortgages on the rental properties will start getting paid off around the time you are retiring from work. Once those mortgages are paid off, your rental income is mostly profit.
Consider this scenario: What if you bought 10 properties over your lifetime and you get those mortgages paid off by the time you retire? If each of those properties netted you around $1,000 per month in rental income, then you would have an additional $10,000 per month in income during your retirement years.
Save on Your Tax Bill
Tax law is favorable to real estate investing. You are allowed deductions at tax time for many of the expenses associated with owning real estate. These include:
- Property upkeep
- Mortgage interest payments
Your overall tax bill is lowered considerably because of these allowable deductions.
You Have Control Over Property Values
You can improve the value of your investment property by simply improving it via cosmetic repairs or adding to the property. For example, adding a third bedroom or furnishing the basement will increase the value of the building.
You actually have some measure of control because you can make improvements that tangibly make your investment more valuable. This is one of the most unique aspects to real estate against other forms of investing.
Defer Real Estate Gains
There is something called a 1031 exchange that allows you to defer any gains realized when you sell your investment property. If you take the proceeds and roll it over into purchasing another investment property, then the taxes owed on the sale are deferred to a later date. This is a huge tax advantage gained once you get serious about becoming a real estate investor.
The Depreciation Advantage
Another favorable tax advantage gained through real estate investing is depreciation. Depreciation is a tax code expense whereby the value is shown to depreciate over time on paper. In reality, the value may actually be appreciating. This depreciation deduction improves cash flow even though you’re legally reporting a lower income figure at tax time.
As you can see, investing in real estate is a good idea for many reasons. If you start investing today, then you give yourself an opportunity for a profitable future.