It can be a daunting task to decide where and how to invest your hard-earned money. But investing in real estate is one of the most rewarding ways you can spend your savings, as it provides an excellent return on investment.
Real estate sales can include single properties, income property, commercial real estate, condo units, and whole buildings. Many people invest in real estate to provide a stable source of income. In fact, with just a small down payment and some time, many people have been able to retire from their jobs by relying on the income from their rental properties. Let’s take an in-depth look at other financial benefits that come along with this type of investment:
Unlike stocks or bonds which require constant monitoring and management, the rental property doesn’t need active involvement once it has been purchased. Once you are able to get in touch with the right property investment consultants, your rental income keeps earning even if you don’t do anything. That’s more or less the definition of passive.
Even if you hire a property manager or handle minor issues, the bulk of your investment can earn money even when you’re not home. Real estate investing gives you the ability to work on your investments while you’re building up your savings and retirement funds.
Real Estate Investments Are Tax-Advantaged
To receive the most benefits from real estate investments, purchasing property as an investment can be a great way to reduce tax burdens. While stocks and bond dividends may be taxed as high as 35%, interest earned from mortgages and depreciation of buildings are exempt from taxes.
Real estate investments can also provide tax deductions when you sell your property. People who sell their properties after owning them for at least two years are eligible for a reduced capital gains rate of up to 20%. There are other benefits that come with long-term real estate investments, including avoiding capital gains taxes on houses or condos that are primary residences.
When you purchase an income property instead of renting it out yourself, your rental income may not be taxable by the federal government.
You’ll Build Equity
When you purchase a home, most of your payments come from the interest that you’re paying on the loan, not from your own money. This means that as long as you stick with your mortgage payment plan, most of your initial investment is spent on building equity instead of earning interest.
As a real estate investor, it is possible to make a cash investment and receive cash for rental income almost immediately after making a down payment. You will continue to pay off your loans over time until you have built up significant equity in your property – at which point it can be sold or refinanced for capital gains “profit”.
Because real estate investments offer immediate returns on the initial investment as well as annual revenue from rental income, they are excellent opportunities for building wealth.
Hedge Against Inflation
Inflation is defined as a general increase in prices across the economy. Inflation is a concern during strong periods of economic growth because it limits your purchasing power and can erode savings.
Although inflation risk is lower for real estate investments than for stocks, it’s still an advantage to have your money tied up in properties whose values are increasing with time. During periods where inflation rates rise, commercial and income property values also tend to increase – which makes real estate a good hedge against inflation.
When a property is purchased for investment purposes, the rental income from the property provides a continuous source of cash flow. As an investor, you receive rent checks every month or quarter, depending on your real estate arrangement.
Even if there are times where the rents don’t cover your monthly expenses for maintenance and taxes, you can often borrow money against the value of the building to cover shortfalls—or simply use other savings that you have accumulated.
Even though real estate investments are characterized by slower appreciation rates than stocks or bonds, they still provide significant returns over time – especially through passive income.
By choosing to invest in income properties instead of single-family homes for personal use, many people have been able to retire at much younger ages with strong incomes provided by their real estate investments.
Real estate investments have lower expected returns than stocks or bonds because there is a larger investment for an equal rate of return. However, real estate investments are advantageous for their steady appreciation rates and passive income potential even if they have lower long-term returns.
For those who can afford to purchase property as both a primary residence and an investment, the tax benefits may outweigh the financial risks of putting most of your money into one type of asset.
You can also reduce risk by purchasing multiple properties instead of putting all your savings into stocks or bonds – especially when you make a habit out of buying low and selling high.
Buying low means that you have chosen the right moment to invest for future appreciation, especially in certain markets where prices are depressed due to economic factors or government intervention. Selling high means that you have chosen the best time to take your profits and diversify into other investments.
Because the down payment for a real estate investment is relatively low, investors can use other people’s money (also known as “leverage”) to make their own investments. Since most real estate investments are financed by either 25 or 50 percent of the total value of the property, it is possible to double your net income through borrowing.
To simplify the calculation, if you purchase an asset with no money down and earn $10 in passive income per month, you would need several years before you could cover your initial investment. However, if you use leverage funding to invest in that same asset and earn $20 per month in returns instead of $10 per month, all other factors being equal you would only need one year to pay back your initial investment.
Leverage funding is most advantageous when the net income of an individual property is higher than the monthly mortgage rate. For example, if your mortgage interest rate per month were $500 and you earned $1,000 in rent every month, it would only take twelve months to cover your initial investment (before taxes) because your rental income exceeded your loan payments.
If you’re looking for a way to diversify your savings, real estate could be an excellent choice for this purpose. Because of the number of benefits that it offers, investing in commercial or income properties can help you increase your spending power and yields over time.
By choosing to invest in real estate instead of stocks, bonds, or other assets, you can also benefit from lower volatility associated with these types of investments – which means that your returns will be more consistent over time without taking as much risk.