Once you have a decent credit score after religiously paying off short-term loan interests through lenders like Payday Depot, you should consider investing your savings. Investing in the stock market has long been popular. Real estate can be a safer, more profitable, and more diverse alternative to stocks in most cases. Let’s look at why real estate is a good idea.
Cash flow is the net profit from a real estate investment after mortgage and maintenance costs. Real estate investing can generate cash flow. In many cases, paying down your mortgage and building equity will enhance your cash flow.
Relief from Taxes
Real estate investors can save money on taxes by taking numerous tax breaks. Ownership, operation, and management costs are often deductible. The cost of owning and developing an investment property can be depreciated over its useful life, allowing you to deduct costs for decades. A 1031 exchange may also allow you to defer capital gains.
Real estate investors can profit from rental income, property-dependent economic activity, and appreciation. Real estate values tend to rise over time, so you can benefit when it’s time to sell. Rents also have a propensity to rise over time, increasing cash flow.
Risk-Adjusted Returns on Investment
Location, asset class, and management all influence real estate returns. Many investors want to outperform the S&P 500, sometimes referred to as “the market.” The average annual return over the last 50 years was above 11%.
Construct Wealth & Equity
Paying down a mortgage adds equity to your net worth. And as your equity grows, you may utilize it to buy more properties, increasing your cash flow and wealth.
Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is suitable for those who wish to invest in real estate but aren’t ready to purchase and maintain properties (REIT). REITs must distribute 90% of their earnings to shareholders; therefore, their dividends are often higher than ordinary shares.
Diversification is another benefit of real estate investing. The relationship between real estate and other major asset classes is tenuous, if not negative. Real estate can reduce portfolio volatility and boost return per unit of risk.
Real Estate Leverage
Financial instruments or borrowed resources (e.g., debt) are used to maximize an investment’s potential return. For example, a 20% mortgage down payment buys you 100% of the house you want. Real estate is a physical asset that can be used as collateral for financing.
Property can hedge against inflation due to the positive correlation between GDP growth and demand. Rents rise as economies, and housing demand develop. As a result, capital values rise. That is why real estate keeps capital purchasing power by passing inflation onto tenants and incorporating it into capital appreciation.
The advantages are not without downsides. Liquidity is vital. It takes longer to buy real estate than stocks or bonds. Still, it has a positive risk-reward profile. Investing in real estate gives a regular income and protects against inflation.