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Housing markets around the country have recovered from the recession, but some investors are asking themselves now: Is real estate a good investment? The answer is a resounding “Yes.” Residential real estate investing is still one of the financial cornerstones for the middle-class to reap rewards with a minimal investment upfront. Real estate investors also reap huge financial paybacks also. The fact is there are so many perks associated with real estate that you can quickly increase your net worth when you learn the art of investing in good properties.
Top 5 Reasons You Should Invest in Real Estate
If you have extra cash you want to invest in today’s shaky economy, you have to pick investments with a good chance of increasing in value over time. Real estate bottomed out a few years ago and is on an upward trend in many metropolitan cities. That means it is a good time to buy, while prices and interest rates are low and prices are expected to climb in the near future. However, there are also a variety of other reasons to answer “Yes” to the question: Is real estate is a good investment? For instance, real estate allows you to get the following perks:
1) Better Control Over Investment
One problem with stocks or bonds is that you don’t have much control over the potential return on investment. In comparison, real estate offers the most leeway to increase the rewards by offering you a little more flexibility and control with your investment. If you want to increase the return on the investment you can, for instance, rehabilitate older houses and then sell them for a bigger market price. Or, if you don’t want to renovate anything, you can still control how much more you intend to make by offering the property up to renters. When housing prices go up, many renters are priced out of the market and are forced to rent rather than buy. Thus, if you want to hold on to the house to gain more equity, you can do it and still create income by renting it out.
2) Cash Flow
When you invest in stocks or bonds, you have to tie up your money until you sell. However, a house can offer a way to create cash flow every month when you rent it out. If you have a low mortgage, you can rent the house out for more than it costs to carry the mortgage and create instant monthly income. This will pay off extra expenses you might incur while holding the house. If your house doesn’t need additional repairs, you can even reinvest that cash flow to keep the property upgraded since you’ll continue to create cash flow as long as you own the property.
3) It’s A Tangible Asset
Houses have more value than just paper, unlike stocks and bonds. They are a physical, tangible, asset. When the market goes down, the value may go down on paper, but it doesn’t eliminate the physical asset. It can still be used to create cash flow, too. Having a tangible asset allows you to never lose the full value of your home, like you can with other types of investments. On the up side, the ability of housing prices to fluctuate also creates the opportunity for the value of the house to increase over time. Even if the house only increases with the rate of inflation, you can get a 3% or more bump in the price of the home that leads to greater equity over time.
4) Access to Leverage
When you invest in real estate, there’s a good chance you’ll want to buy multiple properties to maximize your investment. Real estate offers you the ability to leverage your investment dollars. First, you will only have to put down between 10 and 20% just to finance the first property. When the property value rises, your equity increases with it, even though your initial investment doesn’t change. Once you gain enough equity, you can also leverage that equity to buy other houses by getting a line of credit and using the house as collaterol. You can take that money and invest it in additional properties and rent them out or fix them up to sell. Either way, you can start with a pretty small investment, but reap huge rewards.
5) Tax Incentives
Primary homeowners can claim the mortgage deduction on their taxes. However, real estate investors also get their own set of tax incentives when they buy properties to resell or rent out. You can deduct all the expenses required to rehabilitate or remodel a home as capital expenses when you sell the home, if you bought the property as an investor in an attempt to flip it. By deducting the capital expenses from the income you make off the property, you can offset the profit you make and pay fewer taxes, if any. If you are doing most of the upgrades and buying construction equipment to help you, you can also deduct that as a capital expense. If you buy a vehicle to help you get to multiple properties to fix them up in the course of your business, this is also deductible. You can deduct up to $139,000 in capital expenses for the year if you are a house flipper. If you intend to hold the property for more than a year, for business purposes, like leasing or something similar, you can still deduct the capital expenses associated with the property, but you have to depreciate it over a set number of years. Residential properties expenses associated with a real estate investment have to be depreciated over 27.5 years.
Add It All Up
When you add it all up, the question “Is real estate a good investment?” seems like a no-brainer. Of course, it is! There are no other investments that offer the same record return on investments with such low initial costs.