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What are the Advantages of Real Estate Investing?

Here are 5 of the biggest reasons why so many people today consider real estate to be the best investment around:

Advantage #1: Passive Income Cash Flow

Real estate investing is one of the best ways investors can generate consistent, predictable cash flow. By investing in real estate, an investor can generate passive income that is nearly tax-free. The monthly income (cash flow) that rental properties generate can offset the expenses of the investment.

Advantage #2: Tax Benefits

The cash flow received from rentals are not subject to self-employment tax and the government offers tax benefits for long-term profits.

Many rental property expenses are tax deductible, including mortgage insurance, property taxes, maintenance and repair expenses, management fees, advertising, insurance, professional services, and travel expenses. Depreciation on the rental building is also deductible.

Advantage #3: Appreciation

A unique opportunity of real estate investing is that an investor may use a small amount of their own money and borrow the rest of the purchase and rehab costs from a lender. If the investor uses significantly more debt than equity, the investment is said to be “highly leveraged.”

For example:

Assume an investor invests $10,000 of their own money to purchase a property and borrows the remaining balance of the purchase price, $90,000, from a bank. The combination of the investors’ money with the bank loaned money is used to purchase a $100,000 real property asset.

Assume also that each year for ten years, the investment property appreciates by 5%. The appreciation is on the entire $100,000 asset, not only the $10,000 of the investor’s own money.

In Year 0, the investor will have an asset worth $100,000

+ 5% appreciation

In Year 1, the investor will have an asset worth $105,000

+ 5% appreciation

In Year 2, the investor will have an asset worth $110,250

+ 5% appreciation each year for the next 8 years

In Year 10, the investor will have an asset worth $162,889

Advantage #4: Portfolio Diversification

Having a “diversified investment portfolio” is a fancy way of saying one has a mix of different kinds of investments (stocks, real estate, cryptocurrency, etc). Diversification is a risk management strategy, as a diversified investment portfolio generally yields higher risk-adjusted returns in the long run compared to a non-diversified portfolio.

Within real estate investing, one can mitigate risks and diversify their portfolio by:

1) asset type (single family homes, multifamily properties, commercial complexes, retail, industrial, office space, self-storage, etc.),

2) geographical location,

3) asset class (Class A through Class C), and

4) holding periods (buy-and-holds, BRRRR, etc.).

Advantage #5: Hedge Against Inflation

Unlike bonds and cash, which lose purchasing power as inflation rises causing prices for goods and services to rise, real estate is generally a great way to hedge against inflation. If an investor can lock in a low-interest, fixed-rate mortgage when interest rates are low, then the cost of your home will stay the same as the value of your property rises.

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