Discover the Benefits of Investing in Real Estate
The benefits of investing in real estate, whether it be investing in commercial, residential, real estate investment trusts (REITs), raw land, or crowdfunding platforms, are numerous.
With the proper research and selection of assets, investors are able to build capital over time and relish in many benefits including cash flow, portfolio diversification, passive income generation, tax advantages, and more.
Fun fact: The first major real estate investment deal was the Lousiana Purchase in 1803, which “was a land deal between the United States and France, in which the U.S. acquired approximately 827,000 square miles of land west of the Mississippi River for $15 million.
So if you’re considering investing in real estate, here are some great real estate benefits to consider and why it’s a smart move.
Benefits of Real Estate Investing
1. Cash Flow
When done the right way, real estate investing can be a consistent way to increase your capital.
Cash flow is the measurement of how much money flows in and out of an asset, business, or real estate investment during a set period of time. Cash flow, either positive or negative, is determined by taking the opening balance and subtracting that from the ending balance.
In terms of real estate, the opening balance represents the property’s income, and the ending balance represents expenses, debts, and other forms of outcome.
If a greater amount of debt and expenses were incurred that outweighed the property’s income, there would be negative cash flow. The opposite for when the property’s income outweighs the total amount of expenses.
Typically, when rent prices are high and interest rates are on the lower end of the spectrum, this results in positive cash flow.
2. Portfolio Diversification
Portfolio diversification can be an effective strategy when investing in real estate.
This is because by doing so, you are creating multiple streams of stable income and you reduce the risk of losing out on a lot of money because the investor is not putting too many eggs into one basket.
When adding real estate to one’s portfolio, you are mitigating risk. If a portfolio contains only high-risk investments such as stocks, hedge funds, and leveraged ETFs to name a few, there is an increased chance that your assets may not meet your financial goals and objectives. When real estate is added to the mix, this helps make the risk more reasonable.
3. Passive Income Generation
Passive income is the strategy to which the investor is generating earnings from their assets, without having be involved, or be materially active, in the process of collecting those earnings. Passive income, much like active income, is in most cases taxable.
There are guidelines from the IRS that explain what material participation is. If the case where at least one of these guidelines were true, the investor would not be considered a passive investor.
The investor may need to be involved to some degree depending on the type of investment, so this term is a bit of a misnomer.
But why is passive income a viable strategy?
Passive income is one of the more popular reasons that investors get into real estate, but it shouldn’t be confused with a ‘set it and forget it’ mentality. Properly staying on top of your real estate investments is key to understanding your cash flow and changes within the market.
Passive income has many benefits that can benefit the investor later in life, and these benefits include:
- Generating money as you sleep, work and play
- Increasing your savings
- Reaching your financial goals
- Saving for a vacation
- Rainy day fund
4. Tax Advantages
Real estate investing is a dream when it comes to collecting tax breaks, unlike stocks or mutual funds, because real estate offers many opportunities for deductions.
There are tax benefits and advantages from owning any type of real estate. Some of the deductions and benefits that an investor can enjoy can include:
- Deductions on property taxes
- Repair or upkeep costs
- When real estate wears down over time (length of time that real estate wears down is 27.5 years, according to the IRS), depreciation acts as a protector of income from tax.
- Using 1031 Exchanges – where real estate investors defer paying taxes by reallocating their earnings from one real estate investment, into a new one.
- When holding on to a property for more than one year, your profits are taxed as capital gains instead of regular income. Being taxed on capital gains provides a better tax break, as the investor is only taxed around 15%, instead of what could be a lot higher.
5. Leverage
In real estate, leveraging is the borrowing capital, or debt, from a lendor in order to invest in a property, so you don’t have to purchase the property yourself and use up all of your money.
However, there are risks that are presented with leveraging. If you were to borrow capital and then the property you invested in then has a value loss, you will end up owing more money in the long run.
This is the case especially where there are more than one property involved. When diversifying your borrowed assets into multiple real estate properties, and there is value loss across the board including a drop in acquired rent, this could result in defaults, or even a portfolio foreclosure.
But on the bright side, if done correctly and carefully, you can use the leverage method to borrow money to purchase the property you desire while being able to pay back the rest via payment plans in small increments.
6. Real Estate Acts as a Safeguard from Inflation
Inflation refers to the increase in prices due to a drop in currency value.
Real estate is a great investment that is protected from inflation because it can keep that value even when other monetary systems are failing.
Real estate investing is a natural hedge from inflation because it’s said that real estate can hold value more efficiently than the U.S. dollar.
The U.S dollar is a type of fiat currency, which means that it’s not backed by any sort of commodity (i.e gold), but rather it’s value is held on the faith of the government. If the currency system were to fail significantly, this would not make a difference on a real estate investment, as long as certain conditions were met.
7. Staying in Control
There are numerous ways to invest in real estate, it all comes down to how much you want to spend and what your goals are.
If your goal is to purchase property, fix it up and then sell it, you can do that. This is called house flipping.
You can purchase properties and then hold on to them so they can appreciate in value, become a landlord that oversees multiple properties, divulge into land development, or anything you desire.
Back Bay Investment Group is a real estate investment platform specializing in real estate syndication. Our award-winning investment services aim to acquire, develop, and help you monetize your assets. When you invest with us, you invest with confidence. Contact us today for more information.
