Passive income. Equity. Monthly rents. Tax breaks. These are some of the benefits that come with investing in real estate. While investing in apartment buildings, commercial properties and single-family homes can bring extra income each month and big paydays, it also comes with risk. The goal is to invest in properties that increase in value over time. Real estate investments, though – like all investments – don’t always pay off. Sometimes the real estate you invest in loses value over time.
If you understand the risks and are willing to do the research, finding the best places to invest in real estate could provide you with a solid income boost. Here’s a look at what real estate investing entails and the benefits and possible pitfalls that come with it.
You have plenty of options when it comes to investing in real estate. You can purchase a single-family home, rent it out and collect monthly rent checks while waiting for its value to rise high enough to generate a big profit when you sell. Or you can purchase a small strip mall and collect monthly rents from hair salons, pizza restaurants, mattress stores, and other businesses.
You can go bigger and invest in an apartment building with dozens of units, collecting a steady stream of rent checks from your tenants each month.
The key is to do your research to find out which type of real estate investing is the best fit.
While investing in real estate does come with potential pitfalls and does require research, it can also bring plenty of cash to your bank account. Here are some of the most important reasons to invest in real estate. (Just remember: Appreciation and cash flow aren’t guaranteed. You must research properties and neighborhoods to increase your odds of generating a profit.)
1. Steady Cash Flow
Owning real estate is a way to boost your monthly income. Whether you invest in commercial real estate or residential, you can rent out your space to tenants. You’ll then receive a monthly income in the form of rent checks. Just be careful: You’ll need to research the payment histories of your tenants if you want to reduce the chance that these tenants will one day stop paying their rent.
2. Great Returns
If the real estate you own increases in value over time, you can sell it for a solid profit. Remember, though: Appreciation isn’t guaranteed. You’ll need to invest in the right property to see those big returns.
3. Long-Term Security
Real estate is a long-term investment, meaning you can hold it for several years as you wait for it to appreciate. At the same time, if you rent out your real estate you can earn monthly income while you wait for your property’s value to rise.
4. Tax Advantages
Investing in real estate comes with tax benefits. You can deduct several expenses associated with owning an investment property, including your property taxes, mortgage interest, property management fees, property insurance, the costs of ongoing maintenance, the cost of repairs, and the money you pay to market your property to potential renters. If you sell your property for more than you paid for it, the gain you realized won’t be taxed as income. Instead, it will be taxed as capital gains, which typically come with lower tax rates than income. If you invest in opportunity zones – neighborhoods that are in need of investment – you’ll pay even less in capital gains.
Adding real estate to your investments boosts your diversification, which can protect you in times of economic turmoil. Say certain stocks are suffering because of an economic downturn. The investment properties in your portfolio might still be increasing in value, protecting you from the losses your other investments are taking.
6. Passive Income
Investment properties bring much-desired passive income, which you don’t have to work for every day. Say you charge rent on a single-family or multifamily property. The rent checks that come in each month are an example of passive income.
7. Ability to Leverage Funds
When investing in real estate you probably can’t afford to buy properties in full. After all, that single-family home you plan to rent might cost $200,000 or more. That’s where leverage comes in. Leverage in real estate means you’re using other people’s money to purchase properties. In this case, you’ll take out loans from banks, mortgage lenders, or credit unions and pay them back over time. This allows you to add to your real estate holdings without spending the full amount of money you’d need to buy them on your own.
8. Protection Against Inflation
Real estate investments are considered protection against inflation. When the prices of goods and services are rising, home values and rents typically increase, too. Investment properties, then, can provide you with rising monthly income and appreciation to help protect you financially when the costs of everything else are going up, too.
9. Chance to Build Capital
The big goal of real estate investing is to increase your cash, otherwise known as building capital. When you sell a property that has risen in value, you’ll boost your capital. The key, of course, is to invest in the right properties that will rise in value.
10. Fulfillment and Control
Owning investment properties comes with other benefits that aren’t financial. When you own investment real estate, you are your own boss, which is fulfilling to many investors. You can also make a difference in your community, by providing homes for renters or bringing businesses to commercial properties that will provide much-needed services to their communities.
- Steady cash flow
- Great returns
- Long-term security
- Tax advantages
- Passive income
- Ability to leverage funds
- Protection against inflation
- Chance to build capital
- Fulfillment and control
Now that you know the ups and downs of real estate investing, are you ready to buy your first investment property? Investing in commercial properties, multifamily buildings or single-family homes can bring big returns if you do the necessary research. Whether you are still wondering if you should buy a house, wondering how to buy a house or you are ready to apply and buy, investing in real estate could boost your income.