So you’ve been saving up and now you have enough capital to invest, but you’re not sure if real estate is for you. Of course, there are many other vehicles used for investment purposes such as stocks, bonds, and mutual funds.
One reason why investing in real estate makes other people billionaires is that it is an area of investment that you can have much more control over the outcome. If you invest in a stock, bond, or even a mutual fund, you don’t have much control over what will happen to your investment.
In real estate, you get to play an active role in how your investment is going to perform for you. If you want to increase the value of the property, there are several ways you can do this — through renovations, increasing income for a rental property, and even lowering expenses.
Of course, this is only if you want to have a hand in managing your investment. Some investors simply buy a property and hire someone else to manage it for them.
1. Passive Income
The main reason most people choose to invest in real estate is the fact that it generates passive income. Whether you own several multi-family properties or just one, the rent that comes from the tenants will create a steady stream of income for you as the owner.
Aside from that, real estate has a predictable cash flow. Cash flow is the net spendable income left over from the investment after all operating expenses and mortgage payments have been made. A good real estate investment should provide you with 6% or greater cash flow.
Once you have invested in enough rental properties, the monthly rent that your tenants pay you could be enough to pay for your mortgage and monthly expenses. It’s even possible to retire and live entirely off of your tenants’ rent.
2. Depreciation
Depreciation is an accounting method that allows you to deduct the value of an asset over it’s useful life. The IRS allows you to deduct a percent of the cost of your investment from your taxes each year as a business expense.
The great thing about real estate is that you also get to depreciate the value of the property. In reality, over time, real estate tends to go up in value, not become worthless like other business expenses.
3. Equity
Each time you make a mortgage payment, a part of it goes toward paying interest on the loan, and a part of it goes toward paying down the principal value of the property. With each payment you make, you own more and more of the property.
If you own rental properties and have properly managed and invested in a good property, the income from the rentals will pay the mortgage payment, and there might even be more money left over for repairs, maintenance, and more.
4. Appreciation
On top of owning more and more of the property after building up equity, you will also benefit from an increase in the property value. Over time, real estate typically goes up in value as opposed to other investment vehicles with fluctuating values.
From the 1960’s until the early 2000’s, there wasn’t a single year of decline in the median home price in the United States. But regardless of high-appreciating areas such as major cities, inflation alone pushes up the costs of most things over time, including real estate.
5. Leverage
Leverage is the concept that you can pay for something without paying for the full cost up front. For real estate, you can use leverage by taking out a mortgage loan to buy a property, which means you would only need to put down a fraction of the total cost.
Even though you only pay for a small portion of the purchase price, you are still entitled to enjoy all of the benefits of the property you buy. You get to keep all of the income generated, all of the equity build up, all of the appreciation of the property, and you get to utilize all of the tax write-offs.
As with other investment vehicles, investing in real estate isn’t for everyone. To do it properly and succeed in it, you’ll need to put in the extra effort. But if you want to build up wealth and don’t have any problems with putting in the extra work, real estate might just be the investment you need!
