The stock market is the most common way for investors to grow their dollars. While this is a popular investment option, not all people are aware that buying real estate is also a form of investment. In fact, having real estate as an asset class in your investment portfolio provides diversity to minimize your investment risk.
There are plenty of ways to try real estate investing: real estate investment trusts (REITs) or buying rental properties for capital appreciation and extra cash flow. Under certain conditions, real estate is a great alternative to stock that yields better results, lower risks, and greater diversification.
When it comes to risk, real estate investors turn to the cost segregation technique to limit short-term tax liability and generate cash flow increase through accelerated depreciation tax deductions.
When compared to other investment options, real estate is the best way to grow your money. It can provide long-term wealth, passive income, and a full-time venture if you want to fully commit. With that in mind, here are exciting reasons why real estate makes a great investment option.
Regular cash flow
Real estate provides reliable and consistent income, especially on both commercial and residential properties. Many people invest in real estate for the purpose of having a steady cash flow through rental income. Cash flow refers to the money left after collecting the rent and paying the taxes, insurance, mortgage, and other repairs. An ideal real estate investment must provide you at least six percent or greater cash flow.
The passive income from rental properties offers a steady financial resource for those who don’t want to depend on their nine-to-five jobs. Depending on the property type and location, you can gain significant income to cover monthly expenses and make some extra money for your savings. It’s also a great option for retirees. The money earned helps them finance their retirement funds and social security payments.
Monthly passive income is the same as dividend-paying stocks, except there’s more cash flow with rental properties. When investing in turnkey rental property, you’re free to hire a property manager to take over routine tasks concerning your property, which gives you more time to accommodate more important obligations.
The monthly income generated by rental properties balances out the investor’s expenses, where they also earn considerable profit. Over time, the cash flow regains the money from the initial investment and offers a positive return.
A great tip is to invest in properties in urban cities and towns with nearby colleges because rental housing is always in demand in these areas. As you move forward, you can invest in other rental properties to diversify your investment portfolio and increase positive cash flow.
Another great benefit of real estate investment is the tax exemption from running a rental property. Real estate has unique tax advantages that allow investors to increase their financial wealth over the long run. For instance, self-employment tax does not include rental income.
The government also provides tax benefits through insurance, property depreciation, legal fees, travel expenses, and maintenance fees. Investors also qualify for lower tax rates for long-term investments. Tax codes allow a variety of deductions for regular expenses generated in running a real estate, such as mortgage interests. These deductions will balance out the income and reduce overall taxes.
Depending on your classification and income level as a real estate professional or investor, there’s a bigger chance the rental property will cover tax deductions for other income. Renting properties is still a business, which incurs several expenses, such as travel costs, which can be tax-deductible expenses of owning the business.
If you sold your investment property after one year, the profit is bound by capital gains tax rates, depending on the individual tax bracket which is between 15% to 20% or less than the person’s tax bracket.
In a bear market, there is a 40% correlation between stocks and real estate. When the asset has a low correlation, this means there’s less chance for it to go up or down. This is why real estate is known as a hedge against stock market volatility.
Apart from being a hedge in a bear stock market, real estate serves as a hedge against market inflation. In other words, you get protection against inflation. When property prices increase, the cash flow you earn from the property will also follow, or when prices rise in the housing market, so do your rentals. Basically, it’s all about keeping pace with inflation.
A real estate investment is the key to unlock worthwhile investments for those who want a profitable business. Each investment generates passive income which allows investors to have better control of their time and lifestyle. Research and assess the best real estate investment strategies available to determine which opportunities work best for your finances.