Investment Opportunities
Key Reasons to Invest in Real Estate
The benefits of investing in real estate are numerous. With well-chosen assets, investors can enjoy predictable cash flow, excellent returns, tax advantages, and diversification—and it’s possible to leverage real estate to build wealth.
Thinking about investing in real estate? Here’s what you need to know about real estate benefits and why real estate is considered a good investment.
KEY TAKEAWAYS
* Real estate investors make money through rental income, appreciation, and profits generated by business activities that depend on the property.
* The benefits of investing in real estate include passive income, stable cash flow, tax advantages, diversification, and leverage.
* Real estate investment trusts (REITs) offer a way to invest in real estate without having to own, operate, or finance properties.
Cash Flow
Cash flow is the net income from a real estate investment after mortgage payments and operating expenses have been made. A key benefit of real estate investing is its ability to generate cash flow. In many cases, cash flow only strengthens over time as you pay down your mortgage—and build up your equity.
Tax Breaks and Deductions
Real estate investors can take advantage of numerous tax breaks and deductions that can save money at tax time. In general, you can deduct the reasonable costs of owning, operating, and managing a property.
And since the cost of buying and improving an investment property can be depreciated over its useful life (27.5 years for residential properties; 39 years for commercial), you benefit from decades of deductions that help lower your taxed income.23 Another tax perk: you may be able to defer capital gains by using a 1031 exchange.
Appreciation
Real estate investors make money through rental income, any profits generated by property-dependent business activity, and appreciation. Real estate values tend to increase over time, and with a good investment, you can turn a profit when it’s time to sell. Rents also tend to rise over time, which can lead to higher cash flow.
This chart from the Federal Reserve Bank of St. Louis shows median home prices in the U.S. since 1963. The areas shaded in grey indicate U.S. recessions.
Build Equity and Wealth
As you pay down a property mortgage, you build equity—an asset that’s part of your net worth. And as you build equity, you have the leverage to buy more properties and increase cash flow and wealth even more.
Portfolio Diversification
Another benefit of Investing in real estate is its diversification potential. Real estate has a low—and in some cases negative—correlation with other major asset classes. This means the addition of real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk.
Real Estate Leverage
Leverage is the use of various financial instruments or borrowed capital (e.g., debt) to increase an investment’s potential return. A 20% down payment on a mortgage, for example, gets you 100% of the house you want to buy—that’s leverage. Because real estate is a tangible asset and one that can serve as collateral, financing is readily available.