When it comes to diversifying an investment portfolio, real estate is a great option. There are many ways to invest in real estate. This includes buying houses or commercial property as well as investing in ETFs that are tied to the real estate industry. Here are some of the leading benefits that come from investing in real estate.
When purchased at an appropriate price, real estate can provide a positive cash flow in every month that the property is occupied. This income tends to be stable over time, and it’s usually possible to raise rents as market prices increase. After a property is paid off, the amount of cash flow can explode as there is no longer a mortgage taking part of the rent each month. When investing over a long period of time, real estate is notably profitable.
A company’s stock can go down to a value of $0 if the business goes bankrupt and ceases its business operations. There is little chance that an investment in real estate will ever drop to a value of zero. While the market may crash in a given area, the land itself and any structures on it will still have value. Additionally, it’s likely that rent payments will continue to come in even if the price of a home or office goes down. A disaster that totally destroys a structure will usually be protected by insurance and mitigate this risk. While stocks carry the risk of losing all value, real estate tends to avoid this possibility. That said, leverage can complicate this point. Take care not to take on too much mortgage debt to finance a property, because if the property value falls below the balance owed to the lender, that investment is underwater and can be worth less than zero.
Unlike a private home which provides a deduction of mortgage interest, there are numerous tax benefits that can come with a real estate investment. The costs of renovations are deductible, and so are any tools or materials that are used in a renovation. Additionally, those who invest in real estate can benefit from the cost of depreciation, which is usually calculated over a period of 27.5 years.
The use of leverage can increase returns rapidly. This requires taking out a mortgage with a relatively low down payment. For example, if an investor buys a $100,000 home with $10,000 down, he or she could make a return of 100 percent on the initial investment if the home sold for $110,000 a year or two later. Of course, it is possible to lose money when using leverage, so it is not a risk-free proposition.
Investing in real estate can pay off in the long run. It’s an investment that is sure to retain some of its value over time. Real estate also tends to provide a monthly cash flow that can improve an investor’s financial position.