12 Advantages of Real Estate Investing

The benefits of real estate investing are amazing. In addition to tax benefits, returns, and passive income opportunities, real estate investing offers many other advantages that any real estate investor can take advantage of.

If you’re considering investing in real estate – or want to revisit why you chose to invest in real estate in the first place – here are some of the most talked-about advantages of real estate investing.

  1. Equity

Let’s talk about equity. Simply put, as you gradually pay off the mortgage on your investment property, the value of the property increases, thereby increasing your equity. This is one of the most direct ways to increase your wealth and net worth.

When real estate investors accumulate enough equity, they can use it to borrow, reinvest, or sell investment properties for more than they owe and keep the difference.

  1. Portfolio Diversification

Think of real estate investments like stock market investments. What happens when a stock investor buys only technology stocks, and suddenly the technology market crashes?

That investor’s overall portfolio suffers significantly. Similarly, if you put all your investment “eggs” into one basket (like the stock market), there’s no diversification in your real estate portfolio.

So, what does diversification of a real estate portfolio mean? It means having a mix of different types of investment properties in your portfolio.

Whether it’s collecting rental income from a prime rental property, fixing and flipping homes, or investing in real estate investment trusts (REITs), diversifying your portfolio with different property types can greatly benefit real estate investors if one property type underperforms.

  1. Inflation Protection

Inflation can make some people uneasy, but real estate investors usually don’t have to worry about it. Most of the time, the real estate market isn’t significantly affected by inflation. In fact, real estate investments often increase in value when inflation rises.

If you find yourself in an inflationary environment, which we are in right now, the costs to maintain a property typically rise. Whether it’s labor costs or the price of paint, if inflation severely impacts your profitability, it might be time to rework your investment strategy.

For example, for those in the rental property sector, raising rents can help offset inflation and maintain the positive cash flow you’re used to.

  1. Passive Income

Investing in certain types of real estate, like rental properties, creates opportunities for passive income. Yes, rental property owners spend a significant amount of time ensuring everything is up to code and tenant-ready. A landlord might even upgrade a rental property extensively to charge higher rent.

Of course, good tenant screening is essential for any landlord to increase the chances of getting a tenant who takes care of the property and pays rent on time. From background checks to credit reports, investigating a tenant before signing a lease is crucial.

To put it simply: landlords should say goodbye to any passive income if they choose to skip tenant screening.

  1. DIY Dream Come True

While many real estate investors hire out tasks like repainting a home, replacing a roof, or installing new flooring, DIY investors thrive on doing these projects themselves.

Instead of outsourcing, DIY investors take on various tasks, leveraging a skill set they may have developed by watching friends or family or simply deciding to learn by doing.

The advantage here is significant: whether investing in rental properties or fix-and-flips, DIY investors can choose how much work they want to handle themselves. When done correctly, they save considerably on labor costs, ultimately keeping more money in their pockets.

  1. Cash Flow

Imagine the machine bank tellers use to count cash, running all day because you have an endless supply of money. While this might be an exaggeration, generating cash flow in real estate is crucial.

Although endless cash flow is a dream for many investors, the pursuit of this goal drives some of the most successful real estate entrepreneurs.

To determine your cash flow, focus on the net income from your real estate investments. One of the primary benefits of purchasing investment properties is the potential to create a solid, positive cash flow.

  1. Appreciation

One of the key advantages of real estate investing is the potential for property appreciation. In real estate, appreciation refers to the increase in the value of a property over time.

Generally, the real estate market tends 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 where market values are on the upswing.

On average, you can expect your investment property to appreciate by around 14.5% annually.

  1. Unlimited Investment Types

The term “real estate investor” encompasses a wide range of activities. Your neighbor might consider themselves a real estate investor by renting out their property on Airbnb, while a friend might do the same by investing in land. The beauty of real estate investing is that it isn’t limited to just one type of investment.

If you’re entering the world of real estate investing, here are a few types of investments and properties to consider:

  • Vacation properties (Airbnb, VRBO)
  • Multifamily properties
  • Commercial properties
  • Land
  • Apartment buildings
  1. Goal Funding

Once you establish yourself as an investor, it becomes much easier to think about how to fund your future goals. Whether it’s sending a child to college or taking a dream vacation, successful real estate investors have the financial flexibility to pursue their desires.

Some investors focus on business goals, such as acquiring five commercial properties within three years or paying off a rental property’s mortgage in 10 years instead of 15. Whatever the goal, real estate investing provides the means to build wealth and spend money as desired.

  1. Leverage

Imagine you’ve been searching for real estate investments for months and finally spot 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 assume your lender covers 80% of the investment’s cost, but you keep all the profits. Unlike stock market investments, where you typically have to cover all costs upfront, leveraging allows you to initiate multiple real estate deals simultaneously, as your funds aren’t tied up in a single investment.

  1. Tax Benefits

Real estate investing operates like a business, offering significant tax advantages. Without extensive knowledge of these benefits, investors often miss out on valuable deductions.

Some common tax deductions, depending on the property type, include:

  • Mortgage interest payments
  • Loan origination fees
  • Insurance payments
  • Utility payments
  • Maintenance, repairs, and improvements
  • Marketing fees
  • HOA fees
  • Property management fees

Have you heard of a 1031 exchange? This allows you to defer capital gains taxes by reinvesting the proceeds from a property sale into another property. While a 1031 exchange can be complex, it’s worth researching and discussing with a tax professional before making any decisions.

  1. No Diploma Necessary

One of the greatest benefits of real estate investing is that no formal education is required. Beyond self-directed research and development, purchasing real estate investments can take as much or as little time as you want. While a diploma isn’t necessary, being financially and mentally prepared for future investments is crucial.

So, if you’re interested in rental properties, go for it. If you want to try house hacking one year and owning an Airbnb the next, that’s also fine. Real estate investing offers the freedom and flexibility to pursue any investment at any time.

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