Is It Smart to Invest in Real Estate? 8 Reasons to Invest
It may be true that money alone won’t ensure anybody’s happiness. But money certainly gives people the ability to provide for themselves and their loved ones. For this reason, investing in sources of income that yield a positive cash flow and provide protection against inflation, among other things, is worth anybody’s while.
In partnership with Rob Thomson of Jupiter in real estate, Brotherly Love Real Estate brings you these reasons why it is smart to invest in real estate right now.
1. Positive Cash Flow
The primary benefit of investing in real estate is that it provides a steady stream of income that’s much higher than typical stock dividend yields.
Purchasing and owning commercial properties for lease remains an effective strategy for generating income in the US market, especially when you consider factors such as location, demand, and lease terms.
Due to economic reasons, demand for rentals will continue to rise in 2021 and beyond, as prices are expected to continue climbing in many cities nationwide.
2. Financial Leverage
Another reason why it’s smart to invest in real estate is the financial leverage it brings. Investors generate leverage by utilizing borrowed capital as a source of funds when they invest.
This move enables them to purchase much larger assets while increasing the potential return on their investments at the same time. Simply put, leverage enables investors to profit from other people’s money.
For example, an investor has $75,000 to spend on a single-family rental home. The options for how to utilize this capital are as follows:
- Option #1: Purchase a $75,000 property in cash and produce no leverage.
- Option #2: Put the $75,000 toward purchasing a $150,000 property and use financing options like a bank mortgage loan to cover the other half of the total purchase price. This option produces a 50% leverage.
- Option #3: Use the $75,000 to purchase two $150,000 properties and again use financing options to cover the remaining purchase price cost. This produces 75% leverage and spreads the potential gains and risks of the investor over two properties.
Once the value of the property increases, the investor benefits from it based on appreciation value alone. In principle, the higher the leverage that the investor uses, the higher their gain from asset appreciation.
3. Hedge Against Inflation
While the purchasing power of investors decreases over time due to inflation, an inflation hedge in investing protects them from it. Inflation hedges typically involve investing in assets expected to maintain or increase their value over a specific period.
Real estate is regarded as a hedge against inflation since the price of real estate, multi-tenant assets with a high ratio of labor and replacement costs in particular, also increase.
Now more than ever, it is essential for investors to recognize the advantages offered by owning income-generating real estate as a hedge against inflation.
4. Positive Leverage
A common practice in commercial real estate investing is multiplying the investors’ spendable cash return by making use of favorable debt. Also referred to as “positive leverage,” individual or corporate investors borrow funds and invest them at a higher interest rate than the rate these funds were borrowed.
For example, a specific property that generates a 6% cash-on-cash return has a debt placed on it at 4%. The investors receive payment amounting to 6% of the equity portion and approximately 2% of the amount they borrowed, thereby leveraging debt.
To calculate the positive leverage, investors should know the loan constant, calculated using the total annual loan payment (which consists of the loan principal and interest rate) divided by the total loan amount.
5. Real Estate is a Capital Asset
Real estate is one of the few investment types that has meaningful value in the form of hard assets. For businesses, a capital asset proves to be a significant piece of property as it generates value for them throughout a given period that usually lasts for more than a year.
The land where the property is situated has value, as does the structure itself. The income that the said property produces provides value even to future investors. Unlike the stock market, real estate investments that produce income don’t have a day where their value fluctuates and doesn’t account for too much. Many investors prefer real estate over stocks because it’s less volatile over time.
6. Tax Advantages
Among the several benefits that real estate investments offer, the tax advantages are the hardest to overlook. The top tax advantages that investors can benefit from include:
The fundamental tax advantage of investing in real estate is the ability to deduct certain expenses relating to property investment, including property tax, property insurance, property management fees, property repairs, and mortgage interest.
Depreciation is the method of deducting a property’s loss in value over its expected lifespan. For instance, a property used for business for a year or more allows the investor to depreciate the property’s cost over time.
This method is also applicable to certain capital expenses, such as roof replacement or HVAC installation for years. Depreciation is only applicable for use on investment properties, making it a considerable tax advantage exclusive only to real estate investors.
Tax-Free or Tax-Deferred
Real estate investors can take part in a legal transaction that allows them to swap an investment property for a like-kind one. This enables them to avoid capital gains or depreciation recapture upon the sale of the property.
7. Property Appreciation
Unlike other assets, real estate properties are likely to increase in value over time, mainly due to demand and inflation. These properties historically increase in value as their operating income improves through increased rental pricing and more effective asset management methods.
Some of the top factors that influence property appreciation include:
- Development Quality
- Supply and Demand
- Overall Economy
8. Ownership Mindset
Having an ownership type of mindset is key to being a successful real estate entrepreneur. More importantly, it produces a tremendous pride of ownership factor that is unprecedented among all asset classes.
It is important to note that homeownership remains a distant possibility for most people. This is why owning several multi-family housing units for rent is quite a big deal.
While nobody can predict the future, including the value of rental properties, the real estate industry is well-positioned to continue benefiting from socioeconomic issues of every kind.
Brotherly Love Real Estate specializes in Philadephia real estate. We operate in Pennsylvania and New Jersey. However, many people have decided to move to Florida. For investors moving (or who have already moved) to Florida, Rob Thomson of Jupiter in real estate can help you grow and protect wealth as a real estate investor.