There are lots of reasons why you might want to invest in real estate. It might seem like a pipe dream and out of reach for “normal people.” Many think that they have to be a savvy investor with tons of money — but, with some common sense and research, it’s pretty accessible, even for beginners.
Jim Gilliland, a top real estate agent in Florida, says that the first step for anyone wanting to take the plunge is to assess their finances and visit a mortgage broker or bank to see what kind of loan they can qualify for.
“Based on that information,” Gilliland says, “They can determine the type of property and figure out the location(s) where types of real estate would be available in their price range.”
There are all kinds of reasons why you might want to invest in real estate — probably some you’ve never considered. Here are 19 that we found.
1. Real estate has a high tangible asset value.
Tangible assets are physical things — like property, computers, and equipment — that are worth money. Real estate, especially, will always have some kind of monetary value.
Compare this to investing in stocks where, if the market crashes, it is possible that something you paid $500 for could suddenly be worth $0. With real estate — land and real property — your investment will always be worth something.
2. Real estate appreciates in value.
Real estate tends to appreciate in value over time.
Not only will the building or home itself likely grow in value, but the actual land that it’s built on will also usually be worth more over the years. In some markets, it’s not uncommon for the land to be worth more than the house that stands on it — or for the land value to continue to rise even without a house on it.
Bernie and Marion, a couple from Northern Ohio, bought a piece of land for $10,000 in the 1980s, a lakefront lot in a small undeveloped community. They had intended to build on it and make it a summer home, but never did. Over the years, houses went up all around their lot, and the community grew. Now the lot — still empty — is worth right around $1 million. It will be part of their legacy to their children.
3. The opportunity to maximize value is in your hands.
One of the best things about real estate is that you can improve a property if you want — add amenities like a pool, or improve it with an updated kitchen or bath. You can then either rent it out or sell it for more than you paid for it.
Since real estate is a tangible asset, any improvements you make to it will increase its value. Some things that bring the biggest return for your money are garage door replacements, kitchen remodels, and deck additions.
4. You build equity in your real estate investments.
If you invest in actual houses, your equity in the home should increase the longer you own it. Equity is the portion of the home you own outright — as opposed to the part a bank may own if you have some kind of loan or financing.
As you pay off your loan, you generally build more equity in a property (the exception could be if the market takes a severe downturn, but downturns are generally temporary, so if you can hold on to the property until the market stabilizes, your ability to build equity should resume). Also, as the value of the property appreciates through the years, the house becomes worth more, adding to your equity.
5. And you can leverage that equity.
One great option with real estate investments is that you can take out a home equity loan. This can be set up either as a line of credit or as a traditional loan.
People use home equity loans to pay for college for their kids, home renovations, to buy rental property, or, even, sometimes, to pay off other high-interest debt.
6. Real estate offers better returns than the stock market.
In Florida, Gilliland explains, “Real estate has been appreciating at 6% to 8% a year. Compare that to a money market investment of 1% or 2%, and real estate offers a much better return.”
Nationally, single-family homes offer yearly returns of 9% — a yield that’s tough to come by with stock investments.
7. Real estate is a way to diversify your portfolio.
This is another way to lower some of your risk, especially if you’re investing lots of dollars in other opportunities. Most experts recommend diversifying your portfolio so you won’t lose everything in one fell swoop if the market where you’ve most heavily invested happens to go south. Real estate is an excellent place to park some of your money — a place much safer than many other investments.
Ever hear the term, “safe as houses”? There’s a reason people use it.
8. You can predict the cash flow of real estate investments.
Most investments don’t allow you to predict the kind of cash flow you’ll receive. With real estate, on the other hand, if you know what a property is renting for and that you have a tenant, you’ll know what your cash flow will be. As long as you keep the property occupied, you can count on that money every month. Remember, though, to budget for routine maintenance and repairs, and factor that into your yearly expenses.
If you don’t want to deal with finding and managing tenants yourself, you can hire a management company or a property manager to do it for you.
9. You can establish a passive income source.
Because you can predict cash flow, you can also figure out ways to maximize revenue or cut expenses in order to establish a passive income source that will last as long as you own the property.
Set the rent for your property at an appropriate price and raise it responsibly to cover inflation. Try and always perform preventative maintenance so catastrophes and emergencies don’t sneak up on you. Also, make sure you have the right insurance.
10. You can take advantage of inflation hedging.
Although inflation affects every investment, real estate is an investment that is almost always in demand, so it typically maintains its monetary power. Normal inflation often makes it more expensive for companies to create products and services. They either have to raise their prices or accept lower profits. Real estate doesn’t have a strong correlation with stocks or corporate profitability, so it is a natural inflation hedge.
You can also often pass any inflation costs along to tenants.
11. You get tax benefits with real estate that you don’t see elsewhere.
If you own your own house, you can deduct mortgage interest. State and local property taxes are also usually deductible.
For investment properties, you can often deduct operating expenses and costs, insurance, property taxes, and maintenance.
Capital gain taxes (the taxes you pay if you sell investment properties, or your own home within certain limitations) are 15% to 20%, typically lower than your personal tax bracket, which can be a huge advantage over other types of investments.
If you use the money from a sale of one property to buy another property, you can defer your capital gains. This means you aren’t taxed at all on that money because it went directly toward the purchase of another property. Make sure you report to the IRS that this is what you’ve done, or they’ll send you a letter asking why you haven’t paid taxes on a property sale.
12. You can claim depreciation as an investor.
Although real estate usually appreciates in value, the buildings themselves degrade over time, so investors can claim a depreciation non-cash expense on their taxes. The IRS considers residential rental property to have a useful life of 27.5 years. What this translates to number-wise is that you can divide your cost by 27.5 to figure out what your annual depreciation is. Commercial real estate has a depreciation of 39 years.
Make sure when you’re figuring out your cost to subtract the cost or value of the land. Land doesn’t normally depreciate; only buildings do.
13. It’s a good (forced) way to save for retirement.
A 30-year fixed loan allows you to build equity in your own home over a long period of time. If you decide to downsize when you’ve paid off your loan, it’s likely you can get a smaller house and have a nice chunk of change left for retirement.
With real estate, your money is in the house, so you’ll have to work a little harder to access it (as opposed to a savings account or even a brokerage account that you can cash out).
14. You can use rental income to pay down your mortgage.
Rental income is an excellent way to pay down your mortgage. Renting out a room in your house to a roommate or even your entire house on Airbnb on weekends can provide you some extra cash that you can then put toward your mortgage. Profits from investment rental properties can help you pay down your mortgage sooner, or save for a down payment if you don’t own a home of your own yet. Rental income is also a great source of passive income to add to your retirement plan. You’ll have money coming in even after you retire from your job (not just pensions and Social Security).
If you’re going to use Airbnb to rent out your investment property, a room in an apartment or house that you rent, or even a portion of your own home, check the laws in your city for those kinds of rentals. In many major cities where rent prices are high, some Airbnbs can be illegal. Cities in the U.S. with strict Airbnb policies include New York City, San Francisco, and Santa Monica.
15. You have tons of options.
There are all sorts of ways to invest in real estate. Buying your own house counts. Or you can buy a fixer-upper, renovate it, and flip it. You can rent out a home, offer a lease-option agreement (rent-to-own), or invest in a REIT or a crowdfunding app. Whatever your level of commitment, you can probably find a way to invest in real estate.
A REIT is a real estate investment trust. Individuals can invest in the trust that, in turn, usually owns and manages a large number of real estate investments that produce income — things like shopping malls, hotels, and resorts.
Some real estate crowdfunding apps include Fundrise, Crowdstreet, and Roofstock. The U.S. Securities and Exchange Commission places limits on much you can invest annually in any crowdfunded offering. This limit depends on your annual income and your net worth. For instance, if either your annual income or your net worth is less than $107,000, you can invest either $2,200 or 5% of your income or net worth (the lower of the two) in crowdfunding. Yes, this is confusing — what the SEC is saying is that if you meet the income or net worth limit ($107,000) you can invest either 5% of your income or your net worth (whichever of the two is lowest), or $2,200. Once you understand what those two figures are, you may invest whichever is higher.
For example: if your annual income is $95,000 and your net worth is $65,000, 5% of those (respectively) would be: $4,750 and $3,250. Therefore, $3,250 is the amount you use to compare with the $2,200 amount. Because $3,250 is greater than $2,200, that’s the maximum amount you’re allowed to invest in real estate in a given year.
16. Investing in real estate is good for communities.
You’re helping local economies and providing homes for people (or at least a place to stay). By investing in affordable housing, maintaining it well, and adding upgrades, you can help provide nice homes for people to live in — some of them unable to afford even a small down payment on a house of their own.
If you’re in a position to buy one or two abandoned or unkempt homes and fix them up, you’d be helping the community.
Of course, some people just might not be interested in buying. For instance, Gilliland’s location is “a resort location, a drive-to destination.” “We get a lot of tourists,” he says, “but we also have some big [companies] coming in, and the military, and not everyone wants to buy. Some people prefer renting.”
Houses can also be transformed into other spaces that can benefit communities. Investor Evan Mirapaul in Pittsburgh bought two old houses in the Troy Hill neighborhood and transformed them into eclectic art spaces.
17. The results are almost immediate.
No matter what kind of investment or what your level of investment, you can start seeing returns almost immediately.
18. Real estate doesn’t have to tie up a lot of cash.
In many instances, you can put down as little as 10% on a property, then essentially use the bank’s money to grow your investment.
“Lending is becoming more viable and friendly to buyers,” Gilliland says, “More so than what it was after the housing crisis. They seem to be lessening constraints, and local banks are lending more to builders and doing more in house portfolio loans — so there is just a better environment than ten years ago.”
19. Real estate investing could help you eventually afford your dream house.
If you aren’t able to afford the exact house you want, you could consider buying something more affordable and living in it for a few years to build some equity. After that, you can start investing in some rental property, building your portfolio and net worth (and bank accounts), until you’re able to afford the house of your dreams.
Header Image Source: (Roger Starnes Sr / Unsplash)