Why Invest In Real Estate

Why Invest In Real Estate

Wondering why many people are investing in real estate? Why are some people are buying houses when they already have one? 

The advantages of investing in property investment is numerous. With well-selected assets, investors can benefit predictable cash flow, excellent returns, tax benefits and diversification, and its potential to leverage real estate to create wealth.

Here's what you need to know about the real estate advantages and why real estate is considered a good investment according to investopedia.

Cash Flow

Cash flow is the net result of a REIT after mortgage payments and operating expenses have been made. One of the main advantages of real estate investment is its capacity to generate cash flows. Cash flows only grow overtime as you pay off your mortgage and accumulate equity.

Tax Breaks and Deductions

Property investors can benefit from many tax breaks and deductions that can save money when filing their taxes. Generally, you may deduct reasonable costs of ownership, operation and management of a property. 

Appreciation 

Real estate investors make money through rental income, profits from commercial activity related to ownership and appreciation. The value of property tends to grow over time, and with a good investment, you can generate a profit when it's time to sell. Rent also tend to increase over time, which can cause an increase in cash flow.

Build Equity and Wealth

When you pay down a property mortgage, you accumulate equity - an asset that is part of your net worth. And as you build up equity, you are leveraging to buy more properties and further increase cash flow and wealth.

Portfolio Diversification

Another benefit from real estate investments is the potential for diversification. Real estate has a low - and sometimes negative - correlation with other broad asset categories. This means that adding real property to a portfolio of diversified assets can reduce portfolio volatility and offer a higher return per unit of risk.

Real Estate Leverage

Leverage refers to the use of various financial instruments or borrowed capital (e.g., debt) to increase the potential return on an investment. A 20% down payment on a mortgage, for instance, gives you 100% of the home you want to buy - that's leverage. Given that real estate is a tangible asset and can be used as collateral, financing is readily accessible. 

Competitive Risk-Adjusted Returns

Property returns vary, depending on factors such as location, asset class and management. Still, a number that many investors aim for is to beat the average returns of the S&P 500 - what many people refer to when they say, "the market". The average annual return over the past 50 years is about 11%.

Inflation Hedge

The capacity to hedge inflation in real estate arises from the positive relationship between GDP growth and real estate demand. As economies grow, demand for real estate drives up rents. This translates to higher capital values. Therefore, real estate tends to maintain the buying power of capital by passing some of the inflationary pressure on to tenants and by incorporating some of the inflationary pressure in the form of capital appreciation.

Real Estate Investment Trusts (REITs)

If you want to invest in real estate, but aren't ready to make the jump into owning and managing properties, you may want to consider a real estate investment trust (REIT). You can buy and sell publicly-traded REITs on major stock exchanges. Many trade under high volume, meaning you can get into and out of a position quickly. REITs must pay out 90% of income dividends than many stocks.