My wife and I are active real estate investors. We own and manage a portfolio of rental properties in the state of Washington and continue to believe that investing in real estate is the best way to generate passive income, save for retirement and diversify our investment portfolio. Since people need a place to live, real estate offers a great way to invest our hard-earned money in something that’s always in demand.
You too, can take advantage of this opportunity! I’ve worked with a number of aspiring real estate investors and helped them purchase their first investment property.
Eight Reasons To Invest in Real Estate:
1. Cashflow - Investment real estate produces income once the property is leased. If purchased correctly, the total rent collected can exceed the total expenses associated with owning the property (mortgage, taxes, repairs, etc.). The excess rental income after paying expenses is the investor’s “cashflow.” Owning a property that produces positive cashflow makes it easier for investors to hold these properties whether real estate prices go up, down or stay the same because the investor makes money either way.
2. Appreciation - Like the stock market, the real estate market is cyclical, and prices fluctuate in the short term. However, in the long term real estate prices have tended to appreciate over time because land is a limited resource and people inherently need somewhere to live. Depending on the source you look at and the area you are in, real estate prices tend to increase an average of 3-5% per year.
3. Inflation-protected investment – Rents generally increase with inflation, while mortgage payments on the property remain stable. This increases cash flow, without the increased expense of holding the property. When inflation goes up, it can also mean more people will rent as mortgages become more expensive for average consumers. More renters increase demand, so rents can escalate.
4. Leverage – Banks will loan money to help investors purchase real estate. Try asking a bank to loan you money to buy stocks or Bitcoin and they will likely laugh you out of the building. This is because banks consider real estate a “safer investment” since the loan is backed by tangible collateral. Banks allow you to leverage other people’s money (OPM) to your advantage.
Simplified Example: You buy a rental property worth $200,000 using a conventional 30-year fixed rate mortgage by putting in 20% ($40,000) as a down payment. In five years, the property has appreciated a total of 15% (average of 3%/yr) and is now worth $230,000. The $30,000 equity gain is yours to keep as the investor, meaning you just made $30K on a $40K investment in five years (15% annualized ROI).
5. Tax Benefits – Want to pay less in taxes? Buy investment real estate! Believe it or not, the United States tax code is one big instruction manual for how your largest financial partner (aka the U.S. government) wants you to invest. You see, affordable housing is a challenge that most modern countries face today; the government is well aware of this! If you are generous, and provide others with a place to live, the government rewards you with cool tax incentives like “depreciation” and mortgage interest deductions that help reduce the amount you pay each year in taxes. They also offer tools like the “1031 like-kind exchange” to defer taxes when you choose to sell and reinvest in real estate.
6. Building Equity via Mortgage Pay Down – Most people use a mortgage to purchase investment real estate because it allows the investor to leverage and increase their buying power. The 15-year or 30-year fixed rate mortgage tends to be the preferred way to finance a real estate purchase of 1 to 4 units (i.e. single-family home to 4-plex). When the monthly mortgage payment is made, part of the payment goes toward paying off the mortgage interest while the other part goes toward paying down the principal. The money going toward the loan principal builds equity in the property. It’s like having a savings account in your home!
7. Property Improvement for Equity - Many investors choose to purchase properties at a value price because they lack certain features or are in need of improvements. They have calculated that the value of the improvements will exceed the cost, resulting in an immediate increase in equity.
While stocks and bonds are inflation-sensitive—and they typically involve only value appreciation potential and low or non-existent dividend/interest returns—real estate provides multi-faceted investment returns.
8. More Control – Real estate offers investors more control over their investment than investing in stocks. Most Tesla shareholders do not get to call Elon Musk and tell him how to run his company or allocate his resources. When you invest in real estate, you get to choose where you buy, how much you are willing to pay, how you will finance your purchase, who you rent to, how you structure your lease, what improvements you make to your property, etc. Real estate simply offers investors more opportunity to impact the success of their investment.