5 Reasons To Invest In Real Estate

By Amanda Cruise

Andrew Carnegie famously said 90% of millionaires become wealthy through owning real estate. It’s as true today as it was in the 19th century. You might be considering if real estate investing is right for you.

Reason 1: Cash Flow

Real estate cash flow refers to the amount of money a property generates in rental income minus its operating expenses. Positive cash flow means the rental income is greater than the expenses, providing the investor with a profit either on a monthly or quarterly basis depending on the specific investment.

Here’s how to think of cashflow:

Cash Flow = Rental Income – Operating Expenses

Rental income is the money you receive from tenants.  Operating expenses include things like mortgage payments, property taxes, insurance, repairs, and maintenance.

Reason 2: Leverage

Leverage is the use of borrowed money to increase the potential return on an investment. In real estate, leverage is often used to purchase properties by borrowing money from a lender and using the property as collateral. This allows investors to purchase properties for 20% or 30% down instead of having to put down 100% of the purchase price. This can greatly increase the return on investment.  Just try to convince a bank to lend you money to invest in the stock market!

Reason 3: Principal Paydown (Equity Gain)

Principal paydown is the reduction of the outstanding mortgage balance through regular loan payments. When you make a mortgage payment, a portion of that payment goes towards paying down the principal balance of the loan, while the rest goes towards paying the interest. In the case of investment real estate, the tenants of the property are paying the rent, which is then used to pay the mortgage. So the tenants are actually paying for the principal paydown each month, which will result in more equity in the property over time.

Reason 4: Appreciation

Real estate can naturally appreciate over time, particularly in great locations with population growth and rent growth. Appreciation isn’t a guarantee, it’s usually more of a bonus with real estate and in particular with single family homes. In addition to natural appreciation that might occur over time, there are value-add opportunities in real estate that can force appreciation of the asset quickly. A simple example is flipping a home – taking a dumpy property, repairing it, and making it  nice, and ultimately making the home worth more money. This exact same concept can be applied to commercial real estate as well with value-add strategies to force an increase in the property value.

Reason 5: Tax Benefits

Real estate investing can provide a number of tax benefits for investors.

1. Tax deductions such as mortgage interest and property taxes.
2. Depreciation: Rental properties according to tax law have a useful life, and therefore the value of the property and can be depreciated over time for taxes. This allows investors to take a tax deduction for the wear and tear on the property, regardless of whether the property has actually decreased in value. This is known as a “paper loss” because you haven’t necessarily lost value of the property though on paper for tax purposes you can count a loss.
3. 1031 Exchanges allow an investor to defer paying capital gains taxes on the sale of an investment property if the proceeds are used to purchase another similar “like-kind” property.

Of course you always want to get tax advice from your CPA because each individual’s tax situation is unique.

Is Real Estate Investing Right For You?

Whether or not to invest in real estate is a personal decision that depends on your individual financial situation, goals, and risk tolerance. There are always things to consider before jumping in. You now have a better understanding of the major benefits to real estate investing and why so many wealthy individuals choose real estate investing to build and sustain their wealth.

Real Estate investing isn’t exactly the ‘mailbox money’ you hear about though. It takes real work. Decide if you want to put in that time and effort to be an active investor or perhaps passively investing in real estate makes more sense for you.