Investing in real estate comes with a range of impressive benefits. Beyond tax perks, potential returns, and opportunities for passive income, there are numerous other advantages that real estate investors can enjoy.
Whether you’re thinking about diving into real estate or need a reminder of why you started, here are some of the most notable benefits of investing in this asset class.
1. Equity
Equity is a key concept in real estate investing. In simple terms, as you make mortgage payments and your property appreciates in value, you build equity. This process boosts your wealth and overall net worth.
Building equity gives real estate investors several options: they can borrow against it, reinvest it, or sell the property for more than what they owe, keeping the profit.
2. Portfolio Diversification
Consider real estate investments similar to stock market investments. What happens if a stock investor only buys technology stocks and the tech market crashes?
That investor’s entire portfolio suffers. The same principle applies to real estate: if you invest solely in one type of asset, there’s no diversification.
Diversifying a real estate portfolio means investing in various types of properties. Whether earning rental income from a rental property, flipping homes, or investing in real estate investment trusts (REITs), diversification protects investors. If one property type underperforms, the impact on the overall portfolio is minimized.
3. Inflation Protection
Inflation can make some people anxious, but real estate investors generally have less to worry about. Typically, real estate markets are not significantly affected by inflation; in fact, property values often increase as inflation rises.
During periods of inflation, the costs of maintaining a property—such as labor or materials—may go up. If inflation impacts your profitability, it might be time to adjust your investment strategy.
For instance, in the rental property market, raising rents can help offset inflation and maintain positive cash flow.
4. Passive Income
Investing in certain types of real estate, such as rental properties, can generate passive income. While rental property owners must invest significant time to ensure properties are up to code and tenant-ready, the effort can pay off. Some landlords even upgrade their properties to command higher rents.
Good tenant screening is crucial for any landlord. Conducting background checks and credit reports helps ensure tenants will care for the property and pay rent on time.
In short, landlords who neglect tenant screening risk losing out on passive income.
5. DIY Dream Come True
While many real estate investors hire professionals for tasks like repainting, roof replacement, or flooring, DIY investors find joy in doing the work themselves.
These DIY enthusiasts take on various property tasks, honing their skills over time—often learning from friends, family, or simply diving in to learn by doing.
The advantage is that whether you invest in rental properties or fix-and-flip projects, you have the freedom to choose how much work you want to handle personally. If done correctly, DIY investors can save significantly on labor costs and ultimately increase their profits.
6. Cash Flow
Imagine the machine bank tellers use to count cash, running non-stop as you generate endless income. While that’s an exaggeration, generating cash flow in real estate is crucial.
While endless cash is a dream, striving for substantial cash flow drives many successful real estate investors.
To determine your cash flow, focus on the net income from your real estate investments. One of the key benefits of purchasing an investment property is the potential to create a strong, positive cash flow.
7. Appreciation
One of the key benefits of real estate investing is the potential for appreciation, where the value of a property increases over time.
Typically, real estate markets tend to see property values rise as time progresses. When investing, it’s crucial to conduct thorough research to ensure you’re buying in an area with a growing market.
On average, you can expect your investment property to appreciate by about 14.5% annually.
8. Unlimited Investment Types
The term “real estate investor” encompasses a wide range of activities. Your neighbour might consider themselves an investor by renting out their property on Airbnb, while your friend might do so by investing in land. The reality is, real estate investors aren’t limited to a single type of investment.
If you’re entering the world of real estate investing, here are a few types and properties to consider:
- Vacation properties (Airbnb, VRBO)
- Multifamily properties
- Commercial properties
- Land
- Apartment buildings
9. Goal Funding
Once you’ve established yourself as an investor, it becomes easier to finance your future goals. Whether it’s funding your child’s college education or taking that dream vacation, being a successful real estate investor provides the flexibility to achieve your desires.
Many real estate investors also focus on business goals. For instance, they might aim to acquire five commercial properties in the next three years or pay off a rental property’s mortgage in 10 years instead of 15. Whatever the objective, real estate investing enables you to build wealth and allocate funds as you wish.
10. Leverage
Imagine you’ve been searching for real estate investments and come across an abandoned multifamily property. After thorough research, you purchase it for $150,000, even though its market value is $375,000.
In this scenario, let’s say your lender covers 80% of the purchase price while you retain the profits. Unlike stock market investments, where you usually need to cover all costs yourself, leveraging allows you to spread your funds across multiple real estate deals. This way, your capital isn’t entirely committed to a single investment, enabling you to pursue several opportunities simultaneously.
11. Tax Benefits
Real estate investing operates like a business, and with business ownership come substantial tax benefits. Many investors, unless they thoroughly research tax advantages, might overlook some valuable opportunities.
Common tax deductions for real estate investors, depending on the property type, may include:
- Mortgage interest payments
- Loan origination fees
- Insurance premiums
- Utility expenses
- Maintenance, repairs, and improvements
- Marketing costs
- Property management fees
12. No Degree Required
One of the major advantages of real estate investing is that formal education isn’t necessary. While researching and learning at your own pace is important, purchasing a real estate investment can be done at a speed that suits you. Although a diploma isn’t needed, being financially and mentally prepared for various investment scenarios is crucial.
Real estate investing offers the freedom and flexibility to enter the market whenever you choose.
Why Are You Investing?
Whether you’re investing in rental properties for passive income or contributing to a real estate investment trust, real estate offers a variety of investment options.
Just as with stocks, the real estate market provides numerous property types to choose from. So, what motivates your decision to invest in property?
