Did you know that over 90% of the world’s millionaires invest in real estate? Real estate is an excellent way to build wealth and if you ask me here are 5 reasons you must invest in real estate right now!
Reason #1: Passive income streams
One of the reasons why you must invest in real estate right now is that it can generate passive income. Because of this fact, it is an excellent way to generate additional income outside your 9 to 5 job without having to increase your weekly working hours. Moreover, it can also help you gain financial independence and retire early. A major misconception that most people have is that it is difficult to make money from real estate. Although it requires some time, effort, and energy, depending on how you manage your properties, making money from real estate is not as difficult when you know what you’re doing. So how does real estate earn you passive income?
The first way you can make passive income from real estate is through rental properties. Rental properties tend to either be inhabited on a long or short-term basis. Long-term would be the typical live-in tenant situation with short-term looking more like someone renting a room or house through Airbnb. You can generate regular income from rental properties by choosing a good location because that is one of the most important factors your guests will factor in their decision to rent your property. As a result, having property in more desirable parts of town increase your chances of having a lucrative rental property that is being rented on a perpetual basis.
Examples include central areas that are not far from major highways allowing for ease of transportation. Also, a neighborhood that has basic infrastructures and amenities such as good schools, hospitals, supermarkets, and restaurants is a good location for a rental property. The next step in making passive income with your property is looking for tenants. Before you dive into the rental world, you need to know that not everyone will be an ideal tenant. Some of the information that may help you decide whether a tenant is right for you or not is their employment and criminal history as well as their credit score.
Another way to make passive income is through short-term rentals like Airbnb. This is commonly used by those looking for vacation rentals such as tourists and business people. And just like long-term rentals, location also plays an important role in the success of short-term rentals. Properties that are located in areas with tourist attractions may bring you more money than those that are not. Furthermore, it is important to know that since it is a short-term accommodation, you may have to provide most of the basic things to make your guest comfortable.
Finally, you can invest in real estate and make passive income even if you do not have enough money to buy a property. Real estate investment trust, REIT, is similar to how mutual funds work. It allows you buy shares of companies that are invested in real estate and still make some profit.
Reason #2: Reliable appreciation
Another reason why you must invest in real estate is because of its reliable appreciation. The theory of supply and demand is one of the most important concepts in economics because it influences the price of goods and services. This theory is also important to understand why real estate has reliable appreciations.
Let’s start by refreshing your memory on elementary economics. The law of demand explains that the higher the demand for a product, the higher the price. The world population is constantly on the rise while available land continues to decline. What this means is that there is a constant demand for a finite resource, which is the land. Therefore, the price of real estate is expected to grow steadily over the years and that makes it a good investment for anyone seeking to build their wealth.
On the other hand, the law of supply explains that the lower the supply of a product, the higher the price. This law explains the reason why scarce products are usually expensive because there is a limited supply. From the earlier explanation about how land is limited and the population is constantly increasing, you can see that there is a limited supply of land and that means the price will continue to increase.
Right now, I am going to give you practical examples of how this is applicable in a real-life situation. Let us assume that you buy a property in a location that is developing. For instance, a location where a large manufacturing company is being established. This will result in employment opportunities for people and would be a convenient place for that company’s workers to live. With time, there will be other facilities like schools for the children of these employees, hospitals and shopping centers. Eventually more and more people will want to live in that area and the demand for land will increase. Remember that the supply of land is limited, therefore, you can expect the price to increase.
Also, there are other factors that drive the demand and supply of investment properties. Areas with growing employment opportunities usually witness a continued increase in demand and hence, an increase in the price of properties in such locations. More so, properties that are located in areas with low crime rates, easy access to good roads and infrastructure, experience high demand and steady appreciation.
Reason #3: Diversification
Diversification is one of the most important keywords when it comes to investing. Hence, the reason why the saying “don’t put all your eggs in one basket” is very applicable when it comes to asset allocation. One of the several benefits of real estate, and why you must invest right now, is diversification.
Diversification in investing is a technique that reduces risk by allocating investment across various financial instruments and industries. In other words, diversification is a method of minimizing loss by spreading risk across different assets. It can also mean investing in different industries that react differently to the same situation. Generally, people understand this to some extent and they may even invest in different stocks. However, the stock market is becoming more correlated.
For instance, bad news about the aviation industry may affect the prices of stocks in said industry and the stocks of some other related transportation companies. However, such news may not have any impact on real estate because they are unrelated. Because real estate has a lesser correlation with other asset classes like stocks and bonds, it offers a perfect opportunity for those seeking to diversify their investment portfolio.
Another reason why real estate is a good investment for diversification is that it is a hedge against inflation. The value of real estate typically increases during inflation. For example, you may be able to increase the rent to account for inflation. You also have some level of control over real estate. You can improve the quality of a property by renovating it and that may allow you to rent it out for a higher price or increase the selling price.
Reason #4: Tax breaks
Real estate has an advantage of tax breaks that most other investments do not have. This is one of the reasons why most investors find real estate attractive. You may be able to keep more of your money by following some of the tips I’m about to explain to reduce your tax payment.
Firstly, profits made from real estate are referred to as capital gains and they are treated differently than employment income. Simply put, capital gains are taxed at a lower rate compared to employment income. Another tax benefit that you have is that you can delay paying tax on capital gains after selling a property. This is known as a 1031 exchange. If you sell a property, you can reinvest the profit on a similar property that has the same value or greater within 45 days and close the transaction within 180 days.
Another way to enjoy a tax benefit from real estate is by depreciating the value of an asset for a period of time for tax. In real estate, the value of the land is usually about 15% of the total value while the value of the property is 85%. You cannot depreciate the value of land but you can depreciate the value of the property. For example, you can depreciate residential properties for a period of 27.5 years and commercial properties for 39 years. That means that if you have a property of $200,000, you may be able to depreciate 85% of the property for 27.5 years. That is, you can depreciate $170,000, which translates to $6,181.8 every year. Improvements that add value done on the properties can also be subjected to depreciation. For example, if you fix the roof for $8,000, you can as well depreciate the value for 27.5 years and it is equivalent to $290.91 every year. The value of depreciation every year would be deducted from the annual income before tax.
Furthermore, you can reduce the amount you pay as tax through deductions. Some of them include the amount you paid on managing your property such as the cost of repairs, utility cost and insurance, property tax, legal fees, closing costs, and association fees. You may also be able to deduct the cost of running your business from a home office. Other deductible costs include marketing and advertising expenses, office equipment and supplies, as well as salary if you employ a professional to manage your property. For you to qualify for these tax deductions, you must properly document all your expenses.
Reason #5: Leveraging the power of a mortgage
The last reason why you must invest in real estate is that you can harness financial leverage by borrowing through a mortgage. House prices are quite expensive and it may discourage you especially if you do not have much money. However, you can invest in real estate by borrowing funds from a lender to be able to purchase an investment property without having to cover the entire purchase price yourself.
This means that there is little excuse for not investing in real estate. The only money you need is typically the down payment. Most lenders require you to pay at least 20% down payment of the value of the property while they front the remaining 80%. The advantage of this is that you may be able to get access to better investment with lesser money. For instance, if you have $100,000 you may be able to purchase a more expensive property with a higher return on investment. You may also be able to use the same amount to buy multiple properties that are of lesser value.
Meanwhile, there is this debate on whether it is good to borrow money to finance a house or pay cash. You may be able to avoid interest charges and monthly mortgage payment by paying cash, however, would you be getting the most return for your money? For instance, if you purchase a rental property by borrowing through a mortgage, you may be able to finance the loan from rents paid by your tenants and even start making a higher percentage return.
Let’s assume you paid $100,000 for a property and make $1,100 as rent and your monthly expenses are $450. This brings the net profit to $650 per month or $7,800 per year. This is equivalent to a 7.8% return on investment. However, if you purchased the same property with a 30-year mortgage at 5% and put down $20,000, after you deduct the loan payment of $429.46 from the net profit of $650, you will have $220.54 per month or $2,646.48 per year in pocket. This is equivalent to a 13.2% return on investment. Although investing in a property with a loan involves more risk, you can see obtain a higher ROI when you leverage other people’s money.
To sum it up, investing in real estate is a sound financial move as the 5 reasons I have just gone over will show!