Real estate investing isn’t for everyone. It takes a lot of self-motivation, a willingness to keep up with local market trends and an appetite for some calculated risk. But for those that have a touch of the entrepreneurial spirit, the right real estate investments can yield big rewards for your portfolio.
Here are seven of the biggest benefits of investing in real estate. Are you taking advantage of these?
1. Immediate positive cash flow
When you start a conventional business, it can take years to turn a profit and start earning positive cash flow. But investment real estate properties can be cash-flow positive almost immediately. In most markets, monthly rents are higher than the payments on a long-term mortgage so, even after expenses, you start earning money once you find a rental tenant. The profit margin can also grow over time as you gradually increase monthly rent, while your mortgage payments stay the same.
2. Tax deductions and lower rates
The federal government has a number of tax benefits that encourage real estate investment and can add up to big deductions on your annual tax bill and enhance your overall earnings. You are allowed to deduct all the expenses you incur for renting the property from your rental income, including a large depreciation deduction for the amount you paid to buy the property. Rental income is also taxed at a lower rate than regular business income because you don’t need to pay self-employment tax. In addition, when you sell an investment real estate property, your gains are taxed at the lower capital gains tax rate, instead of regular income tax rates.
3. Tax savings through an IRA
Investing in real estate as part of your retirement plan can offer even more ways to save on your tax bill. The IRS allows investments in real estate through a self-directed IRA, but be mindful of some caveats and exclusions. One of the main benefits of doing this is that you defer paying taxes on your real estate gains as long as you keep those gains – which includes both rental income and profitable property sales – in your IRA. If you use a Roth self-directed IRA, you also won’t owe any taxes on your investment gains when you make withdrawals during retirement.
4. Long-term appreciation
The hallmark benefit of a real estate investment is the steady, long-term returns it creates. While there are market fluctuations – sometimes severe, as we saw in the 2007 crash –real estate values have still consistently increased faster than inflation over the long run. As the United States population continues to grow, so does the need for housing, pushing up market prices. Over the long term, real estate returns are comparable to the stock market, but that’s before factoring in additional tax savings on real estate.
5. Control over your investment
While stock market and real estate investments may yield similar returns, you have much more control over the latter. When you buy a company’s stock, you have minimal to zero ability to influence company decisions that could affect your investment. But with real estate investments, you have a far greater ability to influence your returns. You can research and choose the most profitable investments, add value to the property through reparis and renovations and set rental rates. While rental properties certainly demand a lot of work, the payoff can be considerably more rewarding than stock market investments.
6. Debt leverage
The ability to leverage debt effectively is a crucial investment growth strategy, because it allows you to earn a profit off someone else’s money. In the case of real estate, that “someone else” is the mortgage lender financing the property. If you rent out the property over the life of the mortgage, you are able to pay off the debt incurred for purchasing the home using rental income. Eventually, the house property will be paid off, but you have only paid for a fraction of the investment out of your own pocket.
7. Positive community impact
Finally, real estate investments have the potential to positively impact your community, by improving properties in your area and providing good homes for local residents. All too often, people end up renting from dishonest owners who don’t take care of their properties. By being a reputable landlord, you can feel good about your contribution to society while earning a solid profit at the same time. There aren’t many other growth strategies out there that offer this same intangible benefit.
When you consider these advantages, it’s clear why real estate is a popular investment. Read more about the advantages of investing in real estate using your self-directed IRA.
