6 Reasons Why You Should Invest in Real Estate

Should you invest in real estate? Most investors would tell you yes. Here’s why real estate is a great option for any investor

1. Diversification

Creating a diverse investment portfolio is a popular risk-mitigation strategy. Rather than putting all your eggs in one basket and losing everything if the investment fails, diversifying your investments can help strengthen your portfolio and increase your odds of success.

Real estate in particular offers great diversification since there is little correlation to the changes of the stock market. Unlike stocks, which may become worthless overnight, land will almost always retain some value. Even if the investment doesn’t go as planned, real estate investors can still recuperate a portion of their investment.

2. Protection from Inflation

When inflation causes the price of goods and services to rise, property values and rental prices tend to rise as well. In many cases, it’s actually expected for a landlord to make small annual increases in rent to keep up with inflation and rising costs.

As a result, many properties appreciate in value from year to year. For investors who choose to buy and hold properties for many years, it’s possible to sell the property for more than they paid for it.

3. Cash Flow

The goal of most real estate investors is to develop a passive stream of income from their investments. For landlords, this comes in the form of monthly rent payments from their tenants. If the amount of income is greater than expenses (such as mortgage payments, insurance, taxes, and repairs) then the landlord has positive cash flow

Before making a rental property purchase, savvy investors calculate the projected cash flow so they know their investment will yield a profit. Some investors go by the 1% rule. If the monthly rent is at least 1% of the purchase price, then the investment has a higher chance of being profitable.

For example, if an investor buys a property for $200,000 and rents it out for $2,000 a month, then the deal satisfies the 1% rule. The monthly mortgage payments should not exceed 1% if the investor wants to make a profit.

4. Leverage

Real estate is an industry where investors can leverage other people’s money to fund their investments. Bank loans and government-backed loans are two good options that offer dozens of different mortgage types to aspiring investors.

Private money and hard money lenders are also viable options, but they come with the disadvantage of high interest rates.

5. Tied to Real Property

Real estate is a tangible asset class—you can see and touch it. Having something tangible gives investors reassurance that they own something of value.

Investing in a single property also gives investors a high level of transparency. Investors are able to visit the property, analyze the neighborhood, and look at the property’s historic value in order to predict future performance.

6. Tax Benefits

There are many attractive tax deductions available for property owners, including property taxes and mortgage interest payments. For example, landlords can deduct repairs and operating expenses for the year in which they were made. The cost of improvements and upgrades can be recovered over several years on a depreciation schedule.