8 Reasons to Put Your Money Into Real Estate Investments

Real estate investing involves purchasing properties with the goal of generating profits through rental income, appreciation, and other benefits. It has emerged as one of the most popular vehicles for building long-term wealth and passive income streams. While real estate investing does carry risks like any investment, it offers some unique advantages that make it appealing to many investors.

This article provides an overview of the key benefits of investing in real estate. We will explore how real estate investments can help you achieve financial goals like growing your net worth, securing monthly cash flow, and diversifying your portfolio. Whether you are interested in flipping houses, buying rental property, or investing in real estate investment trusts (REITs), understanding the core benefits can help you determine if real estate is a good fit for your investment strategy.

1. Appreciation

One of the primary benefits of investing in real estate is the potential for appreciation, meaning the property increases in value over time. Real estate values tend to go up for a few key reasons:

• Scarcity - There is only a limited supply of land. As demand rises from a growing population, combined with a fixed or limited amount of land available, this drives prices up.

• Location - Certain locations are more desirable over time, especially neighborhoods that experience gentrification. Prime locations near city centers or transit hubs also become more valuable.

• Improvements - Upgrades, renovations, and developing the land can significantly increase property value. Even normal maintenance and upkeep can allow a property to appreciate as nearby comparable properties age and depreciate.

• Inflation - As the prices of goods, materials, and labor rises over time, replacement cost for real estate also rises, increasing property values.

The potential for real estate values to rise over time is a major benefit for investors. By buying and holding the property, substantial appreciation can be realized when the asset is eventually sold. The equity gained from appreciation can be quite significant, especially for properties held for long periods.

2. Rental Income

Investing in real estate allows you to generate consistent passive income in the form of rent from tenants. Rental income can provide predictable monthly cash flow that is not directly tied to market conditions.

Having rental income can be a huge benefit as it diversifies your revenue streams. The rent collected from tenants can cover costs like mortgage payments, taxes, insurance, maintenance, and repairs on the property. Any remaining profit is money in your pocket each month. This gives your finances a boost and added stability.

The amount of rental income you receive will depend on factors like the purchase price of the property, prevailing rental rates in that area, and demand from tenants. Do your research to determine market rents and occupancy rates before investing. It's ideal to have a property fully occupied with minimal vacancies between tenants.

Owning rental real estate essentially means you are running a property management business. There are costs involved with operating the building and maintaining it. However, managing the investment wisely can lead to appreciating asset values and consistent passive income over time.

3. Leverage

One of the key benefits of real estate investing is the ability to leverage other people's money. Unlike stock market investing, where you can only invest the capital you have, real estate allows you to buy property with a mortgage. This means you can purchase a more valuable asset using mostly borrowed funds.

For example, if you purchase a $500,000 property with 20% down, your down payment is only $100,000. This gives you control of an asset worth 5 times your initial investment. The bank or mortgage lender provides the remaining $400,000 through your mortgage loan.

This concept is known as leverage, and it allows you to maximize returns. The property may gain 10% in value in a year, adding $50,000. On your $100,000 investment, that's a 50% cash-on-cash return. Without leverage, you'd have to invest the full $500,000 to achieve that $50,000 gain and 10% return.

Leverage does come with risks, as you must carry the mortgage and make payments over time. However, when used strategically, leverage provides significant upside potential in real estate investing. It allows you to purchase more valuable properties with less cash out of pocket.

4. Tax Benefits

Real estate investors can take advantage of various tax benefits that are not available with other asset classes. Some of the key tax benefits include:

• Tax deductions - Many expenses associated with rental properties can be deducted against the rental income. These include property taxes, insurance, maintenance, utilities, and mortgage interest. The deductions help reduce your taxable rental income.

• Depreciation - You can deduct depreciation of rental buildings over a 27.5 year period, even if the property is appreciating in value. This reduces your taxable income from the rental.

• 1031 exchanges - When you sell a rental property, you can defer paying capital gains taxes by making a "like-kind exchange" into another rental property under section 1031 of the tax code. This allows you to defer taxes, thereby compounding your returns.

Proper tax planning and working with a knowledgeable accountant or tax advisor can help real estate investors maximize these tax benefits. The tax deductions and deferred capital gains taxes provide a key advantage over other investments like stocks and bonds. This tax advantage enhances rental property returns over the long run.

5. Hedge Against Inflation

Real estate has a positive correlation with inflation, meaning as inflation rises, so do real estate values. When the cost of goods, materials, wages and the general cost of living increases, real estate values also typically increase. This is in contrast to other investments like stocks, which do not directly benefit from inflation.

Rents and real estate values tend to rise with inflation, allowing investors to increase rents over time. However real estate costs like property taxes, maintenance and insurance also rise with inflation. But historically, real estate values have risen faster than inflation over the long run. Real estate acts as a good hedge by providing cash flow that rises with inflation, as well as asset values that rise with inflation. This inflation hedge helps protect and grow an investor's net worth over the long run.

6. Diversification

Real estate provides an additional asset class outside of traditional stocks and bonds for investors. This allows investors to diversify their investment portfolios beyond just stocks and bonds.

Adding real estate to an investment portfolio provides benefits through diversification. Real estate often moves differently than stocks and bonds. When stock prices decline, real estate values may remain stable or even increase. Likewise, when real estate declines, stocks may outperform. This inverse relationship helps balance out the overall risk in an investment portfolio.

Diversification allows investors to reduce their overall risk. Rather than being concentrated in just stocks or bonds, adding real estate spreads out risk across multiple asset classes. If one asset declines in value, the others may hold steady or rise. This smoothes out the overall long-term returns of a portfolio.

Having real estate in a portfolio also provides diversification of geographic location and property type. Unlike stocks which can be heavily concentrated in certain industries, real estate encompasses many geographic markets across an entire country. Real estate investments can target property types ranging from residential, commercial, retail, industrial, etc. This further diversifies risk across different segments within the real estate asset class.

In summary, real estate is an alternative asset class that adds diversification to investment portfolios traditionally concentrated in stocks and bonds. The diversification it provides can lower overall portfolio risk and create more consistent returns over the long run.

7. More Control Than Other Investments

Real estate investing gives you more control over your investment than many other asset classes. As the owner of the property, you get to make important decisions like who to rent to, what renovations or upgrades to make, and when to sell.

With stocks and bonds, you have no direct control. You are not involved in the company's operations or management. Your only options are to buy, hold or sell.

With real estate, you can add value through renovation, redevelopment, or improving operations. You get to choose the property manager if you use one. You decide when to refinance or tap into equity. This control allows savvy investors to increase returns through active management.

Having control over the asset also provides more flexibility in responding to changing market conditions. If the neighborhood improves, you can increase rents. If things decline, you can offer concessions to keep tenants. With publicly traded assets like stocks, you have no ability to actively manage the investment in response to changing conditions.

So for investors who want more of a hands-on role, real estate provides more control over the asset than most other investment options. You get to make choices that directly impact the performance of your investment over time.

8. Stable Demand

Real estate tends to maintain stable demand over time due to the fundamental need for housing. Shelter is a basic human requirement that ensures a baseline level of demand for residential properties, even during downturns in the real estate market. While the economy may fluctuate, people will always need somewhere to live. This provides some downside protection for real estate investors compared to more volatile assets.

Even in weak housing markets, rental demand persists from those unable to afford or unwilling to purchase property. The stability of demand helps keep occupancy and cash flows more consistent for investment property owners. While certain market conditions and neighborhoods may experience vacancies, overall demand across most areas remains relatively steady. This allows investors to better predict and rely on rental income over the long run.

Of course, real estate demand is not completely immune to swings - building booms or housing bubbles can lead to oversupply. But the foundational need for housing means demand rebounds and corrects. By taking a long-term view, real estate investors can feel confident that demand will remain stable due to this underlying human need for shelter. The enduring demand for housing makes real estate a solid, defensive addition to an investment portfolio.

Conclusion

Investing in real estate can be a great way to build long-term wealth if done wisely. This article covered some of the main benefits of real estate investing such as appreciation, rental income, leverage, tax benefits, inflation hedging, diversification, control, and stable demand. While the benefits are substantial, real estate investing does come with risks and is not a get-rich-quick scheme. Proper research, financial planning, and expert consultation is advised, especially for beginners.

To get started in real estate, have a clear investment goal in mind and educat yourself on the real estate market in your area. Determine your budget and financing options. Build a team with a knowledgable real estate agent, lender, inspector, attorney, and accountant. Shop for promising investment properties that meet your criteria and run the numbers to see if it makes sense financially. Make offers with care and don't overpay. If acquiring rental properties, tenant screen carefully and draft solid lease agreements. Leverage property managers if needed. Continuously learn and adjust your strategy. With the right prep and persistence, real estate can deliver lasting rewards.