1. Real Estate Appreciates Over Time
Well-chosen real estate appreciates over time, generally at a rate that far outpaces annual inflation. Yes, there are occasional market corrections, and people can buy the wrong type of property at the wrong time. But I’ve found there is always a chance to buy a quality property at a discount, make improvements to increase equity and eventually sell for a profit. It’s the real estate equivalent of the stock market mantra to “buy low and sell high.” And real estate always has an intrinsic value. A stock can go down to zero, but a property is a tangible asset that will always have value derived from both the raw land and the “improvements” (the building structures attached to the ground).
2. Real Estate Has Unique Tax Benefits
Real estate’s unique tax benefits allow investors to grow their wealth over time. Rental income is not subject to self-employment tax, and the government offers tax benefits to real estate investors. These include depreciation and significantly lower tax rates on long-term profits. And depending on your income level and classification as an investor or real estate professional, there is a good chance your rental property will give you an overage of tax deductions you can use against your other income. Rental real estate is a business, which means many expenses, such as travel costs to check on your properties, are tax-deductible expenses of running your business.
3. Real Estate Provides a Steady Cash Flow
Rental properties can provide a steady flow of monthly income called “cash flow.” This is the extra money that is left after all the bills have been paid. Once your property is set up, cash flow provides ongoing, monthly income that is mostly passive, allowing you to spend your time building a business, spending time with family, or reinvesting in more real estate.
If you’re looking to buy a rental property and need help figuring out the market, you can use a free service like HomeLight to find a real estate agent in your area who can help you find the best deal for you.
4. Real Estate Lets You Use Leverage
You can use the power of leverage to quickly grow your real estate holdings and accelerate your wealth-building results. Leverage is the use of borrowed capital to purchase and/or increase the potential return on investment. Leverage, when used wisely to minimize risk, is a powerful advantage of real estate investing. Using a conventional loan, you can buy an investment property with a 20% down payment. So, for example, with an initial investment of $30,000, you get the opportunity to control — and get all the benefits of owning — an asset worth $150,000. Done with proper due diligence, you can build your wealth exponentially using leverage, especially in the low interest-rate market we’re currently enjoying.
5. Real Estate Builds Equity
When you use leverage wisely, your tenants are essentially buying the property for you. Rental income pays down your loan each month and builds equity for you. When you buy a rental property using a mortgage, your tenant is the one paying the mortgage payment, thus increasing your net worth each month. Think of it as a savings account that grows automatically without your depositing money each month.
Today you might owe $200,000 on a rental property, but next year you might owe only $195,000 because the tenant is making the payment for you, making you $5,000 richer. Thirty years down the road (or whatever the term of your loan), it’s paid down to $0. You own a significant asset that you can sell or continue renting, all thanks to your tenant paying the mortgage.
6. Real Estate Gives You Control
You have a lot more control over your overall investment success with real estate than with other investing classes. You can’t sit in the boardroom and steer management decisions that influence the value of the stocks you own. With real estate investing, you are in the driver’s seat of a lot of decision making. You can mitigate risks and grow your portfolio at a much faster pace investing in real estate. As a real estate investor, I’m in control of my success or failure. When I want to find deals, I can hustle. In a competitive rental market, I employ strategies to make sure the best tenants are attracted to my properties. I can make strategic improvements to increase rental income.
7. Real Estate Provides a Hedge Against Inflation
Inflation is the economic reality that prices increase over time due to the value of money decreasing. The annual inflation rate varies. For the 12 months ending June 2019, the U.S. inflation rate was 1.6%. In 2011, the inflation rate was 3.2%.
Inflation erodes the value of many investments. If your annual gain last year from your stock portfolio was 5.5%, your actual profit was only 3.9%, with the purchasing power of your money decreasing by the rate of inflation.
Real estate investments keep pace with inflation. As the price of a loaf of bread goes up, so do rents and property values. The one thing that doesn’t increase is the monthly cost of a fixed-rate mortgage payment. So as your annual rental income increases, your cost of ownership doesn’t. As inflation pushes the cost of living higher, your cash flow increases. And inflation drives up the value of the property itself. In 10 years, when I want to sell, my properties will be worth a lot more than they are now.