This article is part of our passive investors guide on real estate syndications, available here.
Many people interested in investing their money may wonder what the advantage of real estate is. Many individuals invest in stocks or bonds, but those investments may not always give you a good return on your investment.
This blog post will discuss some of the benefits and advantages of investing in real estate.
The 8 Advantages of Investing in Real Estate:
There are 8 main advantages of investing in real estate in 2023, and they are as follows:
- The Power of Leverage
- Huge Appreciation Potential
- Cash-Flowing Real Estate Investments for Passive Income
- Tax Advantage of Real Estate Investments
- Mortgage Principle Pay Down
- Low Risk for Most Real Estate Investors
- Direct Control of Investments
- Brick and Mortar Asset
1.) The Power of Leverage
One of the benefits of real estate investing is the power of leverage. Leverage means using someone else’s money to invest in yourself; however, you will be responsible if your investments lose money. One advantage of this benefit is that it allows investors to make higher returns on their investments than they usually would without outside help or influence.
You can borrow against the value of the property, which, as mentioned previously, increases your purchasing power, allowing you to purchase more properties and achieve a higher net worth over the same period of time because you have multiple assets working together to build equity.
It is important to remember that with any investment, there is always some risk involved. When using someone else’s money, the bank or lending institution may require you to have a certain amount of equity in the property. You will need to make a down payment on the property, which protects their investment.
ROI & Leverage
Many experienced investors know that one of the most important metrics to use while analyzing a real estate deal is the return on investment(ROI). A simple and effective way to increase your ROI on any given real estate opportunity is by reducing the amount of cash invested in making the deal possible. When comparing real estate investing strategies, it’s essential to consider how your money could potentially be utilized elsewhere. This is called the “opportunity cost” or the cost of missing out on other potential opportunities.
Leverage, specifically high leverage, is excellent for real estate investors to get a high ROI on their deals. Since you aren’t putting all your money into one rental property, you still have cash available to buy more real estate. Your cash investment is collectively growing at a faster rate than if it was an all-in-one property. Individuals’ experience levels and risk tolerance differ, so you must use the amount of leverage you feel comfortable with. Most savvy investors like to use maximum allowable leverage to maximize their ROI.
Here is what leverage looks like in an example. If you were to purchase a $500,000 property and got 80% Leverage approval from your lender, you would be able to buy that home with only $100,000 of your own money. You would be responsible for the $400,000 loan and the property’s expenses since you’d be the owner. If you were to sell the home for $600,000 a few months later, you would keep the difference between what you sold the property for and the loan you need to pay back, which is $200,000. You would have doubled your money on your real estate investment. Now imagine you had the choice to either buy five rental properties with leverage or buy only one rental property with all of your own money.
If you buy 5, you will make $500,000 on your investment, and if you buy just one home, you will make only $100,000. Now, this is a real example that was used to illustrate the strength of leverage; there are additional variables to consider.
2.) Huge Appreciation Potential
Another advantage of real estate investing is the potential for massive appreciation of your investment. Many investors do not realize that they can make a lot more money by purchasing property and waiting for its value to go up in price instead of buying stocks or bonds where you are relying on someone else’s performance with their business, product, or services.
This is not guaranteed, but if you purchase real estate in areas with all of the fundamentals of an excellent real estate market, then it would be as close to a guarantee as possible that your property will go up in value if you wait long enough.
Not All Strategies Are Equal
Not all investment properties appreciate the same. Each real estate investor has their investment strategy and will find a property that makes sense for their risk appetite and investment goals. Many real estate investors search for areas that are likely to appreciate, while others search for monthly income by ensuring a good cash flow. These properties, however, are usually in regions where the purchase price is low compared to average area rents (typically won’t have as great an appreciation potential). The truth is that most real estate investors are seeking a type of investment property that accomplishes both goals.
3.) Cash-Flowing Real Estate Investments for Passive Income
Positive cash flow is probably the most exciting advantage of real estate investing. Investors can use rental real estate to their advantage by purchasing properties that give them rental income. After paying for insurance, property taxes, and mortgage interest, real estate investors can keep the difference and receive passive income from their rental property. This allows the investor to pay off any debt or mortgage tied to the property and earn money in exchange for letting someone else live there.
The stock market, mutual funds, and other investments may not offer consistent positive cash flow over time. This advantage has allowed many real estate investors to retire early or have a supplemental income they can rely on monthly. This advantage has made real estate investing one of the best options for many individuals looking to build wealth.
Another advantage of cash-flowing rental investments is the tax advantages you get from depreciation deductions on your taxes and interest payments (if leveraging).
4.) Tax Advantage of Real Estate Investments
The advantage of real estate investing is that you can utilize tax benefits. Depreciation helps investors offset taxable gains from the property by taking a percentage off each year based on how long the investor has owned it or purchased improvements made to extend its life expectancy.
There is also something called a 1031 exchange which can allow real estate investors to defer paying capital gains tax on their real estate investment. This rule will enable you to trade one property without paying taxes if the replacement asset is equal or more significant. These tax benefits can help any real estate investor grow their investment portfolio more quickly.
5.) Mortgage Principle Pay Down
Another top real estate benefit is a mortgage balance paid down with each monthly payment. When you make your mortgage payment, a good chunk of that money goes towards the loan’s principle. Over time, as you make more mortgage payments, your principal decreases, and your interest payments go down.
It’s crucial to remember that some real estate flipping techniques include purchasing the property “all cash.” This doesn’t imply that real estate is purchased with paper bills; it simply means the investor is buying it without a loan. This allows investors to close faster and maybe get a better price for the rapid closing. They wouldn’t have a mortgage payment so they wouldn’t benefit from any mortgage balance reduction.
Interest Only Loans
Also, for all investors who acquire interest-only loans, this benefit wouldn’t exist either because, as the name suggests, their payment would be for the interest only. These loans are great for keeping the price as low as possible because they are usually temporary high-interest loans used for adding value to real estate. Most investors will either create this value and sell or refinance into a long-term low-interest amortizing loan and keep the property for a monthly cash flow. They will then be able to use their stable cash flow generated from their income property and start receiving this great benefit from their real estate investment.
Although this benefit doesn’t apply to all commercial real estate, it’s still a mighty one because even if your property doesn’t appreciate at all (unlikely to be the case), you can still build in some equity because of this fantastic benefit from owning rental properties.
6.) Low Risk for Most Real Estate Investors
One of the most significant benefits of real estate investing is that it’s a low-risk investment. This advantage comes from the fact that, unlike stock market investments, real estate prices usually don’t drop as quickly. In addition, if you have a bad tenant who doesn’t pay rent or damages your property, you can evict them relatively quickly and find another renter without much trouble.
This advantage means investors are less likely to lose all their money in a short period than they could with stocks during a market crash. It’s also important to remember that real estate investing isn’t just about buying houses; an investor can make many different types of real estate holdings, such as commercial property, land development projects, industrial, multifamily and more.
7.) Direct Control of Investments
When you invest in the stock market, you are investing in a company. That company may be doing well, but it’s out of your control. The advantage of real estate investing is that you have direct control over your investment. You can choose the property, the location, and how you want to manage it. You get to pick which contractors you want to hire, which tenants you sign a lease with, which realtor to work with, and which buyer you want to work with when you choose to sell. This can be seen as a disadvantage to some because it may require you to be more involved. That being said, some investors prefer to be more passive and invest with experienced investors who can execute the business plan on their behalf. Either way, it is a huge advantage to be able to remain in control of an investment that has the power to achieve financial freedom.
8.) Brick and Mortar Asset
One of the greatest features of real estate investing is that you’re investing in a “brick and mortar” asset. This means that it is tangible. A tangible asset is an asset that is a physical thing such as inventory, vehicles, or equipment. One thing tangible assets have in common is that they are physical items that can be seen and felt. Normally a big downside of tangible assets is that they can be lost or stolen, but that’s not the case for investments in real estate.
Although the physical structure could get damaged, you just can’t lose your real estate in a fire, hurricane, or earthquake like you could with some other tangible assets. It’s a smart idea to buy insurance to protect yourself against any of these issues in the unlikely event that they occur.
Related Read: The Pros & Cons of Real Estate Investing
Frequently Asked Questions About The Benefits of Real Estate
Pros: Diverse, lucrative markets. Low transaction costs. Easy to predict future values of property and plan investments ahead of time. Methods for both short and long-term capital appreciation. Secure investment for your retirement savings account.
Cons: Risk of falling prices and slow or stagnant growth in the real estate investment market over time, with value, increases unsteady year-to-year depending on the economy. Low liquidity once you’ve purchased property, unlike stocks that can be sold more easily when needed, such as when faced with a financial hardship or to get cash after an emergency such as a car accident.
Investment in real estate is the best investment because it has the potential to earn relatively high returns with a relatively low level of risk.
This is a difficult question because you’re asking someone else to predict what might happen in the future. Many factors come into play when deciding whether or not to invest in real estate, such as one’s financial situation, interest rates, financial markets (in which country), inflation rates (in which country), available credit, etc. Diversifying one’s assets with low-risk/low-yield and more risky investments can also help balance risks.
Advantage of Real Estate - Conclusion
If you’re looking for a way to invest your money and get a better return, investing in real estate may be the answer. Many of the world’s millionaires created their wealth through real estate ownership. After finishing this blog article, we hope you will have a better idea of some of the benefits of investing in real estate.
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