The benefits of real estate investing are mind-blowing. Besides its tax advantages, returns, and opportunities for passive income, real estate investing offers several other benefits that any real estate investor can take advantage of.
If you’re considering investing in real estate—or want a refresher on why you did it in the first place—here are some of the most talked-about benefits when investing in real estate.
Let’s talk about equity. Long story short, the more mortgage payments you make to own your investment property outright, the more the property appreciates, and in turn, the more equity you build. This is one of the most straightforward ways to start pumping up your wealth and overall net worth.
When a real estate investor builds equity, it allows them to borrow from the equity, possibly invest it, or even sell the investment property for more than what they owe and then keep whatever the difference is.
2. Portfolio Diversification
Let’s think about real estate investments like stock market investments for a second. What do you think happens when a stock investor purchases only technology stocks, and suddenly the technology market goes into a downward spiral?
That stock investor has now put themselves into a position where their overall portfolio has taken a turn for the worse. The point is, if you put all of your eggs, so to speak, into one basket (like the stock market) when it comes to investing, there is no diversification of your real estate portfolio.
So, what is diversification of a real estate portfolio? This means you have a real estate investment portfolio with various investment property types.
Whether collecting rental income from a fabulous rental property, fixing and flipping homes, or even investing in real estate investment trusts (REITs), diversifying an investment portfolio with different property types significantly benefits real estate investors if one property type takes a turn for the worse.
3. Inflation Protection
Inflation makes some people nervous, but real estate investors don’t usually have to worry about it. Most of the time, real estate markets are not really impacted by inflation. The reality is that real estate investments will often rise in value if inflation increases.
If you find yourself in a world of inflation, which we are in right now, expenses to keep up with a property typically increase. Whether it is something like the price of labor or an increase in paint prices, if you find that inflation severely impacts your profitability, perhaps it’s time to rework your investment strategy.
For example, for those in the rental property space, an increase in rent may help supplement inflation and maintain that positive cash flow for your rental property you’ve become accustomed to.
4. Passive Income
Investing in particular real estate, like rental properties, creates an opportunity for passive income. Yes, rental property owners, like any property owner, spend a substantial amount of time ensuring everything is up to code and tenant ready. A landlord may even update a rental property to the nines, hoping to charge more for rent.
And of course, good tenant screening is a must for any landlord to better the chances of getting a tenant who takes care of the property and pays rent on time. From background checks to credit reports, looking into a tenant before signing a lease is essential.
Let me put it this way: Landlords should just say goodbye to any passive income if they want to run the risk of not looking into a potential tenant.
5. DIY Dream Come True
Sure, real estate investors hire work out like repainting a home, replacing a roof, or putting in a new floor, but for DIY investors, this is where the love of the game begins.
Rather than hiring out the work, DIY investors complete all sorts of tasks on the property thanks to an ever-evolving skill set that, honestly, they may have acquired by watching friends or family or simply deciding to take the plunge one day to learn and do the work themselves.
The good news is, whether you invest in rental properties or fix and flips, it’s up to you to decide just how much work you want to do yourself. If done right, DIY investors save a ton in labor costs and ultimately put more money in their pockets.
6. Cash Flow
Picture the machine bank tellers use to count your cash before handing it over. Wouldn’t it be nice to have that machine run all day because you have endless cash? OK, that’s a little extreme, but generating cash flow in real estate is essential.
Although an endless amount of cash seems like a dream for investors, the drive to get to that point creates some of the most successful real estate investors.
To determine your cash flow, pay attention to net income from a real estate investment. An essential benefit of purchasing an investment property is the opportunity to create a solid, positive cash flow.
One of the significant benefits of real estate investing is the opportunity for each investment to appreciate. In the real estate world, appreciation is the increase in value of a real estate investment over time.
Most of the time, the real estate market tends to appreciate properties as time goes on. When investing in real estate, you must do your due diligence to ensure you are in a growing area where market values are continuously increasing.
On average, you can expect your investment property to appreciate by 14.5% each year.
8. Unlimited Investment Types
The term real estate investor means so many different things. Your neighbor might deem themselves a real estate investor by Airbnbing their property, or your friend could say the same thing by investing in land. The truth is, a real estate investor isn’t necessarily stuck to just one type of investment.
If you’re diving into the world of real estate investing, here are a few investment types and investment properties to get into:
- Vacation properties (Airbnb, VRBO)
- Multifamily properties
- Commercial properties
- Apartment buildings
9. Goal Funding
Once you establish yourself as an investor, it’s much easier to think about how to fund your future goals financially. Perhaps it’s one of your kids going off to college next year or a dream vacation you’ve always wanted to take. The bottom line is, a successful real estate investor has more flexibility to do what they want.
Some real estate investors will focus on a business goal rather than a personal one. Perhaps they want to have five commercial properties within the next three years or pay off a rental property’s monthly mortgage payments in 10 years rather than 15. Whatever the goal, real estate investing allows people to build wealth and spend money wherever they want.
Let’s say you have been looking for real estate investments for a few months. Suddenly, on one of your house hunting drives, you spot an abandoned multifamily property. After doing your due diligence, you get the property for a purchase price of $150,000 despite the actual market value being $375,000.
In this deal, let’s assume your lender puts up 80% of the cash for the investment, but you keep the profits from the property. Compared to a stock market investment, where you typically have to front all costs, leveraging money allows you to initiate more than one real estate investment deal at a time because your funds aren’t completely tied to one investment.
11. Tax Benefits
Real estate investing is its own business, and with business ownership comes significant tax advantages. Unless you spend endless amounts of time researching the tax benefits of investing in real estate, it is common for investors to miss out on some profound advantages.
Some of the most common tax deductions, depending on the type of property, could include:
- Mortgage interest payments
- Loan origination fees
- Insurance payments
- Utility payments
- Maintenance, repairs, and improvements
- Any marketing fees
- HOA fees
- Property management fees
Have you heard of a 1031 exchange? You can avoid capital gains if you sell a property and reinvest the gains into another property. A 1031 often confuses newer investors, so research and talk to your tax professional before making any 1031 exchange decisions.
12. No Diploma Necessary
One of the best benefits of real estate investing is that no education is required. Besides research and development at your own pace, purchasing a real estate investment can take as much or as little time as you want. Although real estate investors may not require a diploma, ensuring you’re prepared financially and mentally for future investment scenarios is essential.
So, if you want to get into rentals, go for it, or if it’s house hacking the first year and owning an Airbnb the second year, no problem. Real estate investing allows you the freedom and flexibility to dive into any investment anytime.
Why Will You Invest?
Whether investing in a rental property to help generate passive income or putting money toward a real estate investment trust, real estate investing isn’t limited to one type of investment.
Like stocks in the stock market, there are several different investment properties to choose from in the real estate market. So what’s your main drive for investing in property? Tell us in the comments.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.