Benefits of Real Estate Investment

When thinking about investing, bonds or the stock market might be the first things that come to mind. However, real estate is considered one of the best investments you can make. You can purchase real estate to flip and sell or use real estate investments as rental properties. There are many advantages. Let’s look at a few benefits of real estate investment.

Potential for Appreciation

Appreciation is an increase in financial value. When you invest in a property, you have an asset that has the potential to grow in value over time. This gives you an opportunity to earn a profit when you sell that property. Bankrate noted that home prices appreciated by more than 18 percent between June 2020 and June 2021 (Core Logic). This means that anyone who invested in a property prior to June 2020-June 2021 would have been able to make a significant profit if they sold it during that timeframe.

What factors contribute to a home’s appreciation?

There are several factors that impact appreciation. Smart Asset shares a few:

Market Demand

If the demand for properties increases, prices typically raise as well. If you invest in a property and the market shifts so that there is more demand, you can expect to see appreciation on your property.

Economic Considerations

The economy is directly correlated to home appreciation. Job growth, low levels of inflation, and lower interest rates can positively impact value appreciation. On the other side, high levels of inflation and higher interest rates can lower the opportunity for appreciation.

Location

Location is an important thing to consider when investing in real estate. Properties usually experience faster rates of appreciation in places with higher demand, more job opportunities, and abundant amenities.

The Triangle area is a great place for home value appreciation. An article by Ark7 summarized that, “With the increasing demand for both rental and investment properties, North Carolina has become a hotspot for investors worldwide.” Why? A booming economy, job growth, population growth, high renter population, and affordable housing.

One of the benefits of real estate investment is appreciation potential. By investing, you can acquire an asset that will grow in value and allow you to profit.

Rental Income

Investment properties that appreciate over time can be profitable for investors. Some investors, however, choose not to wait for value growth to earn a profit. Instead, they rent their investment property out, and benefit from the rental income that is earned.

Choosing to rent out a property creates an opportunity for a steady flow of money. This is especially true for a residential property or long-term rental. This stream of income could cover the costs of the mortgage, maintenance, and still provide a profit. Over time, the equity of the home will build up.

Statistics show that approximately 1/3 of people rent their homes. Such a large home rental population means that the demand for rental homes is high. In the Triangle area, in general, there are not enough rental homes available to meet demand. This lessens the risk or worry of not being able to rent out your property locally.

Using an investment property as a vacation rental is another way to earn a passive income. However, there might be more of a risk with this type of investment. This is because short-term rentals might not rent out as consistently as long-term rentals. Despite this increased risk, there is still a great opportunity to earn income and benefit from your investment.

Diversification

Imagine you have wealth that you want to invest. You invest it all in the stock market and then it crashes. You can lose your entire investment. Investing in real estate allows you to diversify your income. Real estate investment differs from the stock market and the risks of investment decrease when you spread your wealth among various places.

Investopedia explains this even further. They say, “Real estate has a low, and in some cases negative, correlation with other major asset classes. This means that the addition of real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk.”

Think of the phrase, “don’t put all your eggs in one basket.” This is true for real estate investments, also. Dividing your investments into various baskets, or diversifying them, will potentially lower your investment risk. Diversification is a benefit of real estate investment.

Tax Benefits

Another benefit of real estate investment is potential tax benefits and deductions. This is especially true if the investment is a business. If it is a business, you will be able to deduct expenses that are directly tied to the business. This could include property taxes, property insurance, interest from the mortgage, and more. Additionally, other business-related expenses could be deducted, such as office space, equipment, travel expenses or mileage, and other fees such legal or accounting fees.

Using these deductions could reduce your overall tax liability by lowering the overall amount of taxable income. It could lower the rate you are taxed at. For example, if you are single and earn $100,000 from that business, but deduct $10,000 of expenses associated with the property, you will lower your taxable income to $90,000, which would put you in a lower tax bracket.

Additionally, if you have your investment property for longer than a year, you could take advantage of capital gains. According to Nerd Wallet, “A capital gains tax is a tax on the profit from the sale of an asset.” Capital gains taxes on assets that are owned for more than a year are often taxed at a lower rate than ordinary income taxes. This means that your profit margin could be higher.

Obviously, I am not a tax specialist. Therefore, I advise anyone who is considering the purchase of an investment property to speak to a professional. However, the bottom line is clear: potential tax benefits are a good reason to invest in real estate.

Benefits of Real Estate Investment

There are many benefits of real estate investment: potential for appreciation, rental income, diversification, and potential tax benefits. The profit potential is high, especially in locations that are thriving. It is important to note, however, that like any investment, there could be risks and challenges. Real estate investments aren’t a profit-guarantee. Figure out your investment goals and research and strategize before jumping into a real estate investment. If you would like to speak to real estate professional, such as myself, to discuss your specific situation and goals in greater detail, please contact me here. Additionally, I can recommend a financial advisor and tax specialist to provide further guidance.

Robert T. Kiyosaki said, “Real estate investing, even on a very small scale, remained a tried and true means of building an individual’s cash flow and wealth.” The question is, are you ready?