If you lose your job today, can you support your family on your investments? Some investors can by earning enough profit from investments for passive income. But where do you start? It’s easy to be confused by the many varieties of investment opportunities, but you can learn what to do and how to manage the risks involved.
What successful investors are doing is not a secret. Their techniques are available to anyone. You, too, can learn how to invest so that you have potential financial protection from economic setbacks such as the loss of your job.
Read on to discover 9 reasons why real estate can be a good investment.
1. Real Estate Can Help Diversify Your Portfolio
Your investment portfolio should include a variety of investments to make the overall portfolio less vulnerable to unfavorable market fluctuations. Real estate investing can be lucrative, but it's important to understand the risks. Key risks include bad locations, negative cash flow, high vacancies, and problem tenants. Other risks to consider are the lack of liquidity, hidden structural problems, and the unpredictable nature of the real estate market.
For example, a portfolio with only stocks could suffer huge losses during a market downturn. But a collection that includes bonds along with the stocks may fare better. Historically, bonds have often shown to be a safe haven for your money when stocks are in decline.
Likewise, adding other types of investments can provide additional stability. The advantage of diversification is that non correlated assets may help smooth the volatility over time because, ideally, the different asset classes are not all down at the same time.
2. Tax Deductions Favor Real Estate
You may be able to make numerous tax deductions on real estate investments. You can deduct the cost of maintaining a property and making repairs. You can also deduct the amount of property tax you owe as well as the interest on your mortgage. Consult a professional tax authority for the specific deductions available to you.
3. Taxes Can Be Delayed for Real Estate
The value of your holdings can increase without tax penalties. Suppose that you add a $250,000 property to your portfolio. In time, the value of the property increases to $300,000. The $50,000 isn’t taxed. You will only pay tax on the capital gains when you sell the property.
4. It Creates Potential Passive Income
Passive income real estate is a strategy through which an investor can create earnings without having to be actively involved. One of the most popular ways to use real estate to earn passive income is through rental properties. Some people hesitate to invest in real estate because they imagine the stress that comes with being a landlord.
However, there are ways to begin investing in real estate without the headaches of actively managing the property. You can place your money in real estate portfolios managed by experienced professionals for a seamless and virtually hands off experience! For this reason, investing in a real estate portfolio or a REIT can seem appealing. However, investors shouldn't be swayed by potential dividend payments since REITs can bear risks of underperforming due to poor management and economic downturns.
5. It Can Provide a Ready Source of Capital
If you need money for a particular project and can’t receive a traditional bank loan, you can borrow from yourself. In other words, you could refinance one or more of your real estate holdings to provide yourself with the funds you need. Refinancing isn’t for everyone. Your home could lose a lot of value and your loan terms may not meet the requirements. This potential flexibility presents you with the option to receive money during tough economic times when traditional lenders are tightening their belts. A robust, well-managed, proven portfolio may convince underwriters to greenlight your refinance application.
6.You Can Improve It
Real estate is an asset that you have the power to improve. In general, as you develop the property, the value rises. Real estate, unlike stocks, is one of the few investment assets that you can play a significant role in making more valuable in the marketplace. Investing can take on a whole new outlook when you realize the active part you can play in increasing your net worth.
7. It's a Possible Hedge Against Inflation
When economies grow, and people have more money than previously, the relative value of some assets can decrease. However, as economies boom, rental prices can rise to keep up with inflation, providing real estate holders with more cash flow. The rise in rent also enhances the appeal of the property, increasing its value. Real estate is considered a valuable ally to have on your side as a hedge against inflation.
8. There's a Potential for Consistent Cash Flow
Ideally the cash generated from rentals should be enough to pay the expenses related to the property, including the mortgage. So the real estate should pay for itself while also providing a steady stream of cash. You can use the profit to invest in additional properties or use it to finance a retirement lifestyle that you’ve always wanted. Historically, rental fees have provided property owners with a comparatively stable source of reliable income.
9. You Can Use Leverage
The wealthy have used the principle of leverage in real estate to amass vast fortunes. Even if your goal is much more modest, you can still use this powerful financial tool to increase your net worth. Leverage relies on using other people’s money. Usually, that means taking out a loan and using the bank’s money to purchase new properties. Why do the wealthy use this technique? Leverage has the potential to make your portfolio grow much faster. Let’s compare making an investment with and without leverage.
First, let’s look at purchasing without leverage. Suppose you use only your money to purchase a property worth $100,000. If, after a year, the value of your property increases by 5%. Your net worth is $105,000. On the other hand, suppose your workmate has $100,000 to invest. But instead of buying a $100,000 property, he uses his money as a down payment on a $500,000 piece of real estate. He simply borrows the rest from his bank. Remember, both you and your workmate start with $100,000. You fail to use the leverage of other people’s money, but he does. After one year, you have only $5,000 to show for your effort while he has $25,000. That’s the power of leverage.
When using borrowed capital to buy a property, the lender will have a lien on the leveraged real estate. This lien is usually referred to as a mortgage or a deed of trust. If you default on the loan, the lender can foreclose on your property, and you can lose your entire investment. In many cases, they may even be able to come after you personally for any money they're still owed after they sell the property.
Real Estate Offers Several Options
If you’re ready to jump into a new real estate venture, there are several options for you depending on how much risk you’re willing to take on. You can buy a house with the intent of flipping it, then rent it if the market turns south. If you buy a rental that appreciates in value significantly, you can sell it. Real estate can be refinanced, rehabbed, and rezoned. You can develop it, lease it, subdivide it, or add parcels to it. This flexibility is one of the many reasons to add real estate to your investment portfolio.