The real estate industry suffered some setbacks in 2020 and 2021, but the future looks bright. House prices are rising, the inventory is low, and it remains a seller’s market.
Buyers are scrambling to get their hands on houses. However, 2022 should be somewhat easier. More sellers are putting their property on the market.
That said, is investing in real estate still a good move? Keep on reading to learn its financial benefits.
Cash Flow
Investing in real estate provides a steady cash flow. It’s the net income after mortgage payments and operating expenses.
When you have rental properties, you receive a monthly income. It applies to both commercial and residential variants. Your cash flow strengthens as you pay down your mortgage.
It’s a form of passive income since you only have to receive rent checks each month. However, being a landlord still requires some effort.
The drawback is managing the property and finding quality tenants. You can outsource these tasks to property management services instead. Even with the additional cost, you still receive a steady income from your investment.
Appreciation
Land value appreciates over time with some exceptions; an extreme example is the Great recession of 2008 and 2009. It depends on the location, as well.
Still, if you do diligent research, you’ll likely see the value of your property rise over time. Experts predict a 7.4% increase in 2022 alone.
When it’s time to sell, you can turn a nice profit on top of the monthly income received while renting it out. Rent rises over time, leading to a higher cash flow.
To maximize your returns, repair the property before selling. Find out the best renovations to increase the value. Even a simple makeover on the kitchen or bathroom can drastically change a house’s worth.
Portfolio Diversification
Do you want to diversify your investment portfolio? Real estate is a solid addition.
Diversification, in general, helps you offset losses – if any were to occur. And the reality is you can’t avoid that from happening entirely.
Adding real estate gives you better chances of coming out of an economic downturn unscathed. While certain stocks are plummeting, your property might still be increasing in value. During the pandemic, for example, home prices soared.
Real estate has a negative or low correlation with other asset classes. Adding it to your portfolio helps you mitigate risks. It lowers volatility and protects you from economic turmoil.
Build Equity
As you pay down the mortgage, your equity grows. It’s an asset that eventually becomes a part of your net worth.
Equity increases over time as your property’s value increases. Aside from making your monthly mortgage payments, you can also further build it by improving or paying extra toward the principal.
You can also use the equity to build your real estate investment portfolio. First, refinance the mortgage. You can take out its cash equivalent and use it as a down payment for another property.
You then build the equity for the second property and do it again. If you can pay in cash for the next one, you can increase your equity and wealth faster.
Long-Term Security
Investing in real estate is a long-term commitment. Whether you’re taking out a mortgage or paying in cash, you’re in it for the long haul.
You hold the property for several years, giving long-term security. You can wait for it to appreciate, or you can rent it out while waiting for its value to rise.
Worldwide, it’s the safest option when you want a long-term investment. Some setbacks are only temporary. If you play your cards right, your property will yield high returns eventually.
Inflation Hedge
Investing in properties can provide a hedge against inflation. It stems from the positive relationship between real estate demand and GDP growth. As the economy grows, property prices and rentals increase.
Over time, your equity builds up. At the same time, your fixed-rate mortgage payments stay the same.
Even as the dollar value decreases, your cash flow from the property increases. Real estate protects your finances when the cost of everything is going up.
In the end, you’re keeping pace with inflation, unlike other forms of investment. It’s in the same category as anti-inflation assets, like gold and commodities.
Even after a recession, you can still bounce back with your real estate investments. The properties with rock-bottom prices in 2008 are back to their usual value in less than a decade.
Tax Advantages
Did you know you can take advantage of tax breaks and deductions when investing in real estate? In general, you can deduct expenses associated with owning a property. These may include:
- Mortgage interest
- Real estate taxes
- Property insurance
- HOA dues
- Property management fees
- Maintenance costs
- Costs of repairs
- Depreciation
You can deduct any reasonable costs of owning, managing, and operating a property from your taxes. You can even write off your self-employment income tax. It depends on your business structure, though.
If you sell your property for a price higher than you paid for it, you won’t have to pay an income tax. After all, the profit is under the category of capital gains. It usually has lower tax rates.
Talk to your tax advisor to discover your tax breaks and deductions. While you can’t assume to write expenses off, investing in real estate is still advantageous.
Learn More About Investing in Real Estate
Investing in real estate is relatively easy. Even a first-timer in the financial industry can do it. However, it still requires due diligence to know when and where to buy a property.
Whether you’re buying for personal or business reasons, you have to get the best value you can get with your money today and in the future.
Do you need more helpful real estate investment guides? To learn more, feel free to check out our other posts.
