It’s a common misconception that investing in real estate is only for the rich and famous. People often feel left out and forget about the prospect. But investing in real estate need not feel like just a pipe dream. It’s a real possibility for almost anyone, even those with little capital.
Why invest in real estate?
There are many reasons to invest in real estate, but we’ll start with the fact that it’s easier than you think. As long as you’re armed with the right information and have a little capital or access to capital, you can invest.
While you need to understand the technicality of investing in real estate, it all starts with your “why.” If you aren’t sure what your reasons are for investing in real estate, consider the reasons below and then get started by checking out the Roofstock Marketplace.
1. Cash Flow and Its Possibilities
The number one reason most people invest in real estate is the cash flow. Cash flow is the money you collect after paying the expenses, such as the mortgage, taxes, insurance, and maintenance/repairs.
You may not imagine this to be much at first, especially if you have a large mortgage payment; however, the cash flow increases with time and without you doing much of anything.
- You’ll pay the mortgage down or off eventually, leaving you with greater cash flow.
- Rents will increase with inflation while your mortgage payment stays the same.
The money you bring in is yours. You claim it as income, so you’ll owe taxes on your proceeds, but like any business owner, there are plenty of write-offs to decrease your tax liability.
2. It’s a Great Business
If you’ve always wanted to be a business owner, this is a great way to start. You don’t need a lot of capital, and you are your own boss. You decide what to do with the property, whether you fix and flip it or buy and hold.
You can continue to grow your portfolio, so you have even greater cash flow and more diversification as time goes on. All it takes is starting with one property. You may even be able to buy it with only a little money out of your own pocket.
3. House Hacking
Most people believe you need a lot of money to invest in real estate. You don’t. You can invest with even a little capital.
The earlier you start the better. You can even invest in real estate you live in. Buying a multifamily unit and living in one unit is called house hacking, and it’s a smart way to invest in real estate. You’re investing in the entire property, yet you’re living in one unit yourself.
You’ll receive lucrative financing options because the property is considered “owner-occupied” while still enjoying the cash flow from the units you rent out. Owner-occupied financing has better terms including lower interest rates and borrower-friendly terms.
4. Real Estate Appreciation
If you buy and hold real estate, you can take advantage of the appreciating value. This is a top reason people use when asked why invest in real estate?
When you sell the property, you’ll earn the capital gains—plus the cash flow you earned while renting the property out.
Besides the natural appreciation, you’ll earn equity in the home as you pay the mortgage down. Since you pay the mortgage with money from your tenants, it’s instant equity for you. While you can’t touch it, the equity adds to your net worth and is there for you to cash in if you need to.
If you need the appreciation, you have two options:
- Refinance and take out some of the home’s equity
- Sell the home and keep the proceeds of the sale after paying off any liens
5. Portfolio Diversification
No matter your financial goals, there’s always room for diversification. Investing in a variety of stocks, bonds, and mutual funds is a start. Diversifying among various industries and investment types helps, but often it’s not enough.
Diversifying some of your income into other investments outside the market can be a great way to realize the financial gains you desire. When your portfolio is broadly diversified, you are subjected to less market volatility and stand to make greater gains.
Real estate usually reacts opposite of the market. If the stock market dives, for example, it doesn’t mean real estate will too. In some cases, it may even do better, which offsets any losses you had in the market.
6. Tax Deductions
Real estate is tax deductible. We all dread April 15th when we write that big ‘ol check to Uncle Sam. But what if you could offset those taxes with legitimate write-offs? Investing in the stock market provides little help, except for any losses you can claim.
Investing in real estate, though, provides plenty of opportunities. If you invest as a business, you probably have legitimate business expenses to write off. Whether they are home office deductions, mileage, interest on your mortgage, or property depreciation, there are numerous ways to lower your tax liability as a real estate investor.
7. Increase in Property Value
Properties can always be improved. While not every rehab project will give you a dollar-for-dollar return on the value, certain upgrades make a big difference. With a little sweat equity and money, you could increase a property’s value, which means increasing your equity and/or capital gains when you sell the property.
8. It’s a Tangible Asset
Tangible assets usually have monetary value, even if it’s not the amount you hoped – it’s always worth something. Investing in an asset you can see and feel offers reassurance you’ll always have ‘some value’ in it. While the real estate market ebbs and flows like any other market, it will rarely be worth $0, like stocks or other commodities could.
9. Real Estate Investments Have Leverage
You can borrow capital from a home’s equity to further invest. Whether you use the funds to fix up the subject property or buy another investment property, you increase your investment portfolio and/or net worth by borrowing funds.
You use a mortgage against the property to reduce the capital you must invest, but you still earn a decent return on your investment.
10. You’re in Control of the Value
You may not be able to control the market, but you can control what you do to the home. Renovating it or adding features may increase the home’s value and increase your return on investment. Not every renovation will increase the value dollar-for-dollar, but you should see at least small increases in the value for each change.
11. Cash Flow Is Predictable
It’s nearly impossible to predict the cash flow stock investments offer. You don’t know if the stock price will increase or decrease when you’re ready to sell. Real estate is much easier to predict. You know how much you’ll charge for rent and when you do and don’t have tenants. Even if you have periods of vacancy, you’ll know ahead of time of the lack of cash flow. When you sell stocks at a loss, there’s no predicting if/when that will happen.
12. You Can Take Advantage of Depreciation
The IRS allows investors to depreciate real estate on their tax returns. This means you can deduct the cost of the investment over its useful life. Because real estate doesn’t depreciate (become useless) like equipment, though, you enjoy the capital gains when you sell the property, but can offset the income throughout the years you own the property.
13. You Don’t Need a Lot of Cash
Investing in real estate sounds expensive, but you don’t need a lot of capital upfront to purchase it. You may find investment mortgage loans for as little as 10 percent down. If you buy a $200,000 property, that’s just $20,000.
While that’s a sizable investment, in the grand scheme, you’re buying a $200,000 asset that will likely appreciate through the years. With your cash flow, appreciation, and eventual capital gains, you’ll see a much higher return on your investment than you might see if you invested that $20,000 in the stock market.
14. You’ll See a Return on Your Investment Fast
When you think about why invest in real estate, fast returns are one of the most prevalent reasons. If you hate waiting for the market to shift or don’t like the unknown when looking at your market investments, real estate is more predictable.
As soon as you buy the home and set up tenants, you’ll earn cash flow. If you price it right, you’ll have a positive cash flow right away, even after paying your mortgage, taxes, insurance, and maintenance costs. Not too many investments offer returns this fast.
15. You Have Many Options
Investing in real estate doesn’t have to be complicated or overwhelming. You have options.
If you’re a DIYer, buying a fix and flip is a great way to get into an investment with little capital. You can buy a house for a low price, fix it up and sell it for a profit. The barrier to entry is lower because of the lower price and you get the satisfaction of fixing up a home and seeing the fruits of your labor.
If you’d rather buy a home that’s ready to rent, you’ll pay higher prices but be able to find tenants right away. You can even buy a turnkey property that is not only ready to rent but often comes outfitted with renters already. The work is done for you, which means you can invest locally or even long-distance and enjoy the cash flow.
16. Rental Income Is Great Passive Income
Millionaires have 7 streams of income, including passive income. Rental income is one of the easiest ways to earn passive income. Once you buy the home and set it up with tenants, you earn money passively.
You can use the money to pay down your mortgage, supplement your retirement income, or save for a special goal.
17. Real Estate Investments Are Great for Retirement Income
If you’ve maxed out your tax-advantaged retirement savings, investing in real estate is one of the best ways to save more money for retirement. It’s the reason many people use when asked why invest in real estate.
You invest money in a home that appreciates. If you leave the home as-is (don’t refinance or sell it), your investment increases. The longer you keep the real estate, the more money you’ll earn. When you retire, you can sell the property and use the capital gains for retirement. You can also keep the property and tap into the equity using a home equity loan or cash-out refinance loan.
18. You Can Defer Capital Gains Taxes
If you sell a real estate investment but use the proceeds to invest in another property, you can defer the tax liability. The IRS calls it a 1031 exchange or a like-kind exchange. As long as you invest the money in a new and similar property, the IRS doesn’t assess a tax liability on the capital gains.
You can offset the tax liability until you sell the final property and take the cash, rather than investing in another property.
Add Real Estate To Your Investment Portfolio
No matter how much (or how little) money you have or how incapable you think you may be of investing in real estate, don’t let that stop you from considering it. If you’ve asked yourself ‘why invest in real estate,’ you have your answers and can start.
Anyone can invest in real estate—and, the sooner you start, the more money you’ll make. Diversify your portfolio by adding real estate to it and see where it goes! You may find you love the process, and you can use the equity in your first real estate investment to buy more properties and grow your portfolio even more. The sky’s the limit, and it all starts with your first step.