Why Real Estate Investment?
Real estate is both a powerful investment vehicle and a necessary part of any investor's well-balanced portfolio. While there are dozens of benefits to investing in real estate, we’re going to highlight our Top 5 for you.
1. Allows for a Passive Approach
With many rental property setups, assets can be structured to be managed by a third party, which means little to no time or involvement on a personal level. A properly structured investment affords the investor the ability to offload work to a management company on a larger scale, resulting in slightly smaller, but more secure returns. Partnering with the right professionals takes risk out of the investment, and shortens the proverbial learning curve.
2. Incoming Cash
Incoming cash from rental properties can fund further growth and operations. The alternative to this being returns that are locked up in an investment, with only value-based "unrealized" returns. For example, a stock may be “worth” a higher amount than the price you purchased it for, but until you sell the stock, you haven’t realized any true profit. Furthermore, once you dispose of it, you also remove the opportunity for further growth, leaving you looking for another investment. Real estate assets can provide both real value growth over time, as well as cash flow from operations. This cash can be used to make capital improvements (which improve cash flow and increase value), as well as give an investor the ability to reduce their debt liability, or to fund further expansion.
3. Tax Benefits
There are many provisions in the US tax code which allow savvy real estate investors to reduce their tax liability. The most common type of real estate tax benefit is the often-mentioned "write-off". There are many types of tax write-offs an investor can take including depreciation, loan interest, capital expenditures, and operating expenses. In some cases, an investor can even accelerate depreciation. Other tax benefits include the ability to roll losses in these asset classes into subsequent years, also helping offset the overall tax burden on an individual or business entity. Perhaps the most powerful tax benefit is the 1031 exchange, which allows an investor to sell a property and roll the proceeds from the sale of that property into a new property, tax free. The US tax law changes annually, and this article should not be taken as guidance. It is important that you contact a CPA for tax planning advice.
4. Value Growth Compared to Inflation
Real estate generally tends to appreciate over time, typically keeping up with, or exceeding inflation, while other asset classes may lag behind inflation. Many investors use real estate to hedge against the negative effects of inflation on their other holdings. Rent also tends to increase over time, meaning that you may generate higher cash flow returns in the future, with no increase in liability on the real estate.
5. Risk
In comparison to other investments, such as startups or the stock market, real estate is much easier to manage - not to mention, may help you sleep a little easier at night. A stock market crash will have only minimal impact on a real estate portfolio. Diversification of what you own is important to hedge against other risk factors.
As always, a diverse portfolio of different types of investments is the key to healthy, long term growth and success!