Investing in real estate can be a smart move or the worst mistake that you will ever make. You need to do proper research before investing in this lucrative field, where you can make a lot of money or lose a lot of it. Despite the risk, there are advantages of investing in real estate. This is what we look at below.
1.Income Or Cash Flow
This is in income that you will generate from renting or leasing your property out. It can increase over time as market rates increase. If you are renting out a large commercial property, you will generate more income as there are more tenants. In the case of vacancies, a multiple occupancy property is still advantageous since the other tenants will still be paying their rents. In the case of a single family residential, you will be losing money when there is a vacancy period.
Property appreciates or increases in value over time. Internal factors like proactive management can cause a property’s value to increase. Proactive management, for instance, can result in cost-effective improvements to the property, increasing the asset’s desirability and usability. An imbalance between supply and demand is an example of an external factor that could cause a property to appreciate.
This is using various financial instruments or borrowed capital to increase ROI. An example will be appropriate to make this concept clear. If you want to buy a property, you will make a down payment of for instance $100,000 on an asset worth $500,000. The remaining $400,000 is usually referred to as other people’s money. The lender (a financial institution for instance) will provide the remaining $400,000. If the property appreciates by 5% every year, your net worth will grow to $525,000 within 12 months.
If you had used the same $100,000 to pay for a property worth $100,000 (in full), if we worked with the same appreciation rate, 5%, the ultimate net worth would have been $105,000 by the end of the year.
Leveraging works because the lender caters for the remaining amount by providing the loan, for instance, if it’s a financial institution at a lower interest rate than you will charge the buyer of the property, in our example. This way, you comfortably pay your loan back without using any more of your own money, thus the concept of “other people’s money.”
4. A Cushion Against Inflation
Investing especially in commercial real estate is a good way to cushion yourself against inflation. Multi-tenant assets have a high ratio of labor and replacement costs. During inflation, real estate prices increase. In commercial real estate, both the property and the property’s land have value. If you choose a good location and good asset quality, your property will have the potential to earn income in spite of what may happen to the tenants.
As a real estate owner, you can benefit from depreciation deductions, business expense deductions, the IRC 1031 exchange, mortgage interest, and investing tax-free with self-directed IRAs. In an IRC 1031 exchange, you can sell your investment and buy another similar one, tax deferred. These tax benefits can really shield a significant part of your income. You need to consult a tax advisor in order to understand any tax benefits that you could take an advantage of.