29/11/2020
Thinking about investing in real estate? Here's what you need to know about real estate benefits and why real estate is considered a good investment.
β Cash Flow -
Cash flow is the net income from a real estate investment after mortgage payments and operating expenses have been made. A key benefit of real estate investing is its ability to generate cash flow. In many cases, cash flow only strengthens over time as you pay down your mortgage and build up your equity.
β Tax Breaks and Deductions -
Real estate investors can take advantage of numerous tax breaks and deductions that can save money at tax time. In general, you can deduct the reasonable costs of owning, operating, and managing a property.
β Appreciation -
Real estate investors make money through rental income, any profits generated by property-dependent business activity, and appreciation. Real estate values tend to increase over time, and with a good investment, you can turn a profit when it's time to sell. Rents also tend to rise over time, which can lead to higher cash flow.
β Build Equity and Wealth -
As you pay down a property mortgage, you build equity, an asset that's part of your net worth. And as you build equity, you have the leverage to buy more properties and increase cash flow and wealth even more.
β Portfolio Diversification -
Another benefit of investing in real estate is its diversification potential. Real estate has a low and in some cases negative correlation with other major asset classes. This means the addition of real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk.
β Real Estate Leverage -
Leverage is the use of various financial instruments or borrowed capital (e.g., debt) to increase an investment's potential return. A 20% down payment on a mortgage, for example, gets you 100% of the house you want to buyβthat's leverage. Because real estate is a tangible asset and one that can serve as collateral, financing is readily available.
β Competitive Risk-Adjusted Returns -
Real estate returns vary, depending on factors such as location, asset class, and management.
β Inflation Hedge -
The inflation hedging capability of real estate stems from the positive relationship between GDP growth and the demand for real estate. As economies expand, the demand for real estate drives rents higher. This, in turn, translates into higher capital values. Therefore, real estate tends to maintain the buying power of capital bypassing some of the inflationary pressure on tenants and by incorporating some of the inflationary pressure in the form of capital appreciation.
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