Whether it's planning for retirement, building a college fund, or earning a passive income, many individuals consider investing. Some choose to invest in stocks and bonds. However, there are other approaches (perhaps, more effective approaches) to consider. So, how about real estate? We've gathered the top five reasons real estate is a smart investment.
With an affordable entry point, real estate offers excellent potential for growth and diversification in personal investments. Real estate will always serve as a safe, stable asset to reduce risk in your portfolio. While not all properties meet the requirements for a conventional mortgage, many real estate investors can secure multiple mortgages and diversify their portfolios with only 20 percent down. When it comes to real estate investments, your holdings can range from traditional family homes and condo complexes to commercial spaces and co-ops. Even empty lots are in the game, although not always recommended.
Unlike traditional approaches to investments, real estate is separate from the stock market and the market fluctuations in major financial centers. Real estate is a tangible investment asset; therefore it is more dependant on the local market. Since 2000, real estate investments have earned a return of 10.71 percent annually, compared to 5.43 percent for stocks.
Multiple Ways to Generate Returns
People invest in real estate to earn a passive income. The tenant's monthly rent pays the mortgage. So essentially, the tenant is paying for your investment. Everything from an apartment building to a well-run storage unit complex can bring in positive cash flow. On average, rental properties receive 8 to 12 percent annually in their return on investment from the income generated from renting out the unit.
If you’re in it for the short-term, flipping homes is another way to invest in real estate.
If you’ve watched any home improvement show for a minute, you'd see it’s making sort of a comeback. The magic is all in the reno, as a super savvy team transforms a junky property into a total real estate jackpot. In 2017 alone, flipping accounted for 5.5 percent of sales of all single-family homes and condos.
Ownership & Building Equity
Long-term real estate investments don’t only produce a positive cash flow every month, they also build equity. Equity is the market value of your house minus the amount you still owe the lender on the mortgage. If you were to sell, equity would be the money you receive after you pay off the mortgage. For example, if your house is worth $100,000 and you still owe $75,000, your equity is $25,000.
Many investors buy properties at a lower price point because they lack specific features or could use some improvements. They have calculated that the value of the improvements will exceed the cost, resulting in an immediate increase in equity.
Ability to Leverage
Real estate investments give you the ability to leverage your investment capital, mortgage financing, and your time. Using $100,000 in leveraged assets to purchase three properties with down payments, instead of one for $100,000 cash, can significantly increase profits. Of course, all leverage includes a risk, so the investor must understand how leverage also impacts their real estate investments.
Tax Benefits of Real Estate
Real estate taxes are a difficult beast to tame. Even if you decide to call on the help of an expert, it’s crucial first to learn the basics of real estate taxes.
The Tax Cuts and Jobs Act (TCJA) has opened a new window of opportunity for investors and property buyers--a 100 percent first-year bonus and depreciation deduction. This break is retroactive for 2017 tax filings on property acquired in the service by September 2017 and will be available until 2022, when the begins to reduce by 20 percent until it phases out. The bonus depreciation deduction on improvements to real estate may include air conditioning and heating systems, ventilation, alarm systems, and fireproofing.
There are ways to avoid losing money on a real estate investment, like leveraging a Section 1031 exchange to avoid capital gains taxes. Deductions can mean more positive cash flow for the investor and less money sent to the IRS. It also allows real estate owners to diversify or trade up without taking a tax hit. These capital gains tax-deferring benefits have also been protected by the law in the overhaul. Since there are some not-so-beneficial sections in the TCJA, now is the time to restructure portfolios to reduce tax exposure, while setting up years of compounding gains and double-digit tax savings.
From Diversification to 1031 Exchanges, our realtors know their stuff. And with a flat fee of $3,000 or 1% on pricier homes, they are hands-down the best realtors to pick for your next investment purchase. Now that's Clever. Call us at 1-833-2-CLEVER or complete our online form to get connected a top-rated local agent that will list your home with a discounted commission rate.