Five Reasons Why Real Estate can be a Good Bet for Investment
The former President of the US, Franklin D. Roosevelt, once said – “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” And we couldn’t agree more with him.
For decades, real estate has been increasingly preferred over other investment options by people who intend to multiply their savings and wealth over time. While real estate investing is not the easiest alternative for beginners, it is believed to be one of the most satisfying and lucrative investment options for investors once they learn to climb its learning curve.
Meanwhile, a wonderful fact associated with real estate investing is that its benefits hold true in the past as well as present and are expected to remain valid in the future. Having said that, let us discuss some key reasons that prove why real estate is a good bet for investment:
1. Delivers Value Appreciation
History continues to evince that real estate appreciates in value over time. The longer the person is able to hold onto his property, the more money he tends to make. In fact, not only the property itself increases in value, but the actual land on which it is built is also usually worth more over the years.
With appreciated property values, even the seemingly lower value property in the suburbs or on the outskirts of cities become a gold mine in the future. Normally, price appreciation in real estate is stimulated by infrastructure development, upcoming or available amenities, policy changes by the government and the macro-economic situation of a country.
Investors can reap the rewards of price appreciation when they eventually sell the property, making huge profits as long as they have done proper research and made a good investment.
2. Generates Passive Income
Individuals can expedite the process of building wealth and achieving financial freedom via passive income. For the uninitiated, passive income is the amount a person earns in a way that needs little to no daily effort to maintain. Interestingly, real estate allows you to create passive income. People can seek different ways to establish a passive income source via real estate that lasts as long as the person owns the property.
Real estate syndications is one such way to earn passive income from real estate, which involves multiple investors pooling their capital to buy a property. One of the great advantages of real estate syndications is the transparency in the person’s level of risk. Another option is real estate crowdfunding, in which a group of individuals amalgamate their capital to purchase real estate. Crowdfunding utilises social media outlets and the internet to reach an audience of potential investors.
3. Allows Investor to Predict Cash Flow
Cash flows from real estate assets are believed to be far more predictable and stable than most other investments. If a person invests in rental properties and has a tenant, it is relatively easier for him to foresee the cash flow. In fact, the person can count on that money each month as long as the property is occupied. However, it is important to factor into routine maintenance, repair charges and mortgage payments (if any) while estimating cash flows.
Cash flows can help individuals stay afloat during bad times and help them build other businesses or reinvest in additional properties. As rental properties usually lead to increased cash flows down the road, they seem to be a perfect investment for retirement, yielding greater returns as time goes by.
4. Provides Tax Benefits
Real estate investing is known for providing substantial tax benefits, allowing an individual to build considerable long-term wealth by mitigating certain tax obligations. With real estate investing, individuals can get tax deductions on cash flow from investment properties, mortgage interest, property taxes, operating expenses and costs, depreciation (even if the property gains value), insurance, etc. These deductions can offset income and reduce individuals’ overall taxes.
It is imperative for people to be well aware of the real estate investment tax strategies to squeeze out all possible deductions and make reliable investment decisions. Maximizing tax benefits demands maintaining and recording as much information on the property as possible, including its estimated market value.
5. Can be Leveraged
Leverage involves the use of different financial instruments or borrowed capital to increase the investment’s return. It is considered to be the ultimate power of investing and is offered by real estate. In real estate transactions, leverage takes place when a mortgage is utilised to reduce the amount of investor capital needed to buy off a property. Leverage can be understood as – a 30 per cent down payment on a mortgage that provides an individual 100 per cent of the property he wants to purchase.
Meanwhile, banks are usually supportive in lending huge sums of money to purchase real estate as it is considered one of the most safest and profitable investments available. Individuals can leverage their property by taking a loan against rent receivables or using facilities like top-up loan, home equity loan, overdraft against property or reverse mortgage. While leveraging a real estate investment, investors can harness the benefits of appreciation on the overall asset value while investing just a small amount of their own money.
Although real estate investing sounds exciting and offers tremendous benefits, it can be complex for novice investors. Thus, it is crucial for investors to be aware of the long-term benefits and risks associated with real estate investing before making an investment decision. Investors should focus on striking the best deal possible while taking all risks into account.
Mr. Kunal Sawhney
CEO, Kalkine Group