Why invest in real estate?
Real estate as part of the alternative investment asset class is essentially an investment vehicle of a riskier nature than mutual funds, stocks and bonds. Due to this higher level of risk, real estate should also generate more of a return on your investment than the traditional investment options. There are several reasons why we should invest in real estate. This post highlights six reasons that you want to include into your own investment due diligence.
Let’s first point out that in real estate if the property under consideration does not prove to be a cash flow positive asset, it will by default be a liability. Purchasing property requires more initial capital than the traditional investment options. However, when investing in real estate, investors have more leverage over their money enabling them to buy a more valuable investment vehicle. This added value give the investor great advantages:
Control – Most of us like the control aspect of real estate. You chose your deals and you manage the property the way you want. Transaction after transaction you will learn to evaluate the investment in order to stay away from the ones you choose not to invest in.
Cash flow – After insurance, principal and interest payments, property management fees (if you need to hire), rainy day fund, etc. The balance will be the positive cash flow that creates liquidity for the investor. A balance that will be predictable and stable.
Tax Benefits – Now that you have a stable positive cash flow, did you know that this income is taxed at a lower rate than your salary and wages? That’s right. And not only that but depreciation expense can serve to be like a free loan from the government. This is simple the case because depreciation expense allows you to defer income taxes until your property is sold for a profit.
Loan pay down – If you're in control of your investment, the property will be rented and the tenant’s rent payment will cover the mortgage. Therefore, with every rent payment completed the investor’s net worth grows.
Appreciation – Real estate appreciation should be considered using the long-term concept. As the loan is paid down the property simultaneously on average can and will go up in value. This is yet another way the investor’s wealth grows.
Inflation Hedge – For those that have a fixed interest rate mortgage payment, note that as the cost of living increases your cash flow should also increase. This is true because inflation causes everything to increase including your property value and rents in general. This makes real estate an asset that allows you to hedge against inflation.
Just remember, all investments carry risk. For real estate, the main ones are liquidity risk, market risk and interest rate risk. Making the commitment is easier once all aspects of a deal are examined. It’s not only BMG's opinion but once the good ones are found, the payoff is well worth the time.
