5 Big Benefits Investing in Real Estate
Most people think of investments as monetary accounts such as stocks, IRA’s, mutual funds and bonds. However, real estate is an excellent way to diversify your investment portfolio. A recent study done by Gallup indicated that most Americans feel real estate is the best type of investment available. American’s confidence in real estate has been steadily rising since 2011 as the market has continued to improve. 31% of survey respondents listed real estate as the best investment with stocks and mutual funds following at 25% and gold as the third preference at 19%.
It turns out that Americans are correct in their feelings surrounding real estate investments. Over time real estate is the best long term investment available. Here are 4 benefits of investing in real estate.
While many lost confidence in the appreciation of real estate values after the 2008 housing market collapse, real estate still remains a great long term investment. Over the course of a couple of decades a property’s value does increase enough to yield profits for owners. However to maximize the profits on a property it is advisable that people do not finance anymore than their initial loan amount and continue to pay down their loan as quickly as possible.
2- Tax Free Growth
Owners Occupants are only responsible for capital gains taxes if they own a property for less than 2 years. After two years of ownership homeowners can collect up to $500,000 in tax free profits in a life time.
Real Estate Investors also get to take an annual deduction for depreciation. Depreciation is not a cash expense, and generally the value of the property should be going up so this write off effectively lets investors shield other income and profits from taxation. When its time to sell, investors can permanently delay capital gain taxes, by using a process called a 1031 exchange.
3- High Leverage
Real estate provides the highest leverage possible for those looking to invest their own money. You cannot walk into a bank and offer to give them $50,000 in exchange for $200,000 in stocks. However, you can make a down payment of $50,000 and use their capital to purchase a property currently worth $200,000. This benefit allows you to invest in a higher value property immediately.
4- Inflation Hedge
Homeowners are protected against inflation as values of homes continue to rise and rental prices keep increasing. The value of their home continues to increase as their mortgage decreases. Furthermore a fixed rate mortgage will protect against the risk of rising interest rates. After owning a home for 10-15 years homeowners will have a mortgage payment that is below the national average and a substantial amount of equity.
Rents will grow with inflation, in fact rents are now soaring in Central PA despite relatively tame inflation over the last few years. Increasing rents when coupled with a fixed rate mortgage drive real estate investor’s income higher.
5- High Rate of Return
It is possible in much of Central Pennsylvania to purchase income producing property with rental returns of 10-20%. Compared to savings accounts at .05%, bonds at 2-3% or dividend paying stocks of 3-4%, it is tough to find alternative investments that can produce the level of income real estate investment produce.
You don’t have to own multiple properties to be considered a real estate investor. Even homeowners who only own their primary residence can take advantage of the benefits of investing in real estate.