Investment in real estate has been considered a tool of wealth accumulation over the past several years and will continue to trend in the coming years owing to its lucrative benefits such as handsome returns, tax benefits, diversification of portfolio, and many more, which we discuss later in detail in this article. Some homeowners also invest with the intent to meet a specific financial goal at a predetermined period, whereas others have other reasons to invest. However, real estate investment requires a well-planned strategy no matter what the rhyme and reasons are, so be mindful of every single detail related to the investment. If you are planning to invest in real estate, this article will give you more insight into real estate investment.
Reasons/Benefits for Investing in Real Estate
There are numerous reasons to invest in real estate, which vary from one person to another. For some, the aim could be to enjoy a consistent return, while for others, it could be to accumulate wealth for a child's higher education. Here are some of the key advantages of investment in real estate.
Generates Cash Flow
Cash flow is one of the prime reasons to invest in real estate. Cash flow is the net income you get after adjusting mortgage payments and operating expenses and the best thing is that cash flow strengthens over the years once mortgage payment is made.
Help Diversify Your Portfolio
Real estate investment is a smart way to diversify your portfolio because concentrating investment in one asset is risky, as any political or economic change may negatively affect the investment portfolio. Real estate investment helps you in the diversification of your portfolio.
Tax Advantage
Investment in real estate also gives an opportunity to save income by claiming different tax exemptions. As a real estate owner, you can claim exemptions on repair and renovation, depreciation on property, cost incurred in hiring a property management company,cost of traveling to and from the property, mortgage interest, interest paid to a secondary loan, or any other cost incurred on owning and maintaining the property. All these will help you save money by reducing the tax liability.
Creates a Source of Passive Income
Another advantage of real estate investment is that it generates passive income to build up more wealth to meet other financial goals. The income generated through tax benefits, rental income and appreciation of property in the future are the passive source of income. Investing in Real Estate Investment Trusts (REITs) is another way to invest in commercial and residential real estate projects to gain 100% passive return without the hassle of managing the property.
It Keeps Your Investment Protected From Inflation
Investment should be selected with utmost care to ensure it gets least affected by inflation. Though complete protection from inflation is not practical for any investments, real estate is much safer. Rather, inflation increases the value of the real estate.
It Keeps Your Investment Protected From Inflation
Real estate investment enables you to leverage your other assets. For example, if you buy a second property, all you have to pay is the down payment, and the rest can be managed through a mortgage. No other investment provides an option to control assets with minimum investment.
Equity and Wealth-Building
Investing in real estate (commercial or residential) helps build wealth by acquiring more real estate assets and opening multiple sources of income generation like rental income or appreciated value of the asset. This wealth management helps you after retirement with bulk return in hand.
Home equity is part of the asset you own. When you pay part of the property mortgage, you build your equity, which gives you more leverage to invest in real estate, creating a source of income.
Provides the Option to Choose the Level of Involvement
Apart from other financial benefits associated with real estate investments, there is another benefit of the investment. It extends to you the freedom to choose if you directly want to manage the property or wish to involve a property management company to look after the daily affairs. No other financial investments give this leverage to the investors.
Create Wealth for Future Generations
You can start a legacy of wealth creation for the financial stability of future generations as well by investing in real estate. Pass on the real estate properties to the heirs.
The Value of the Property Appreciates
The value of real estate property tends to appreciate over the years, so when you plan to sell, it can fetch you a handsome return on investment. These investments also fetch decent returns through rental income which increase over the years. Real estate investment gives you an opportunity to mint money.
Less Volatile
These investments are less volatile in comparison to other investments like stock. Any minor economic shift has a larger impact on stocks, unlike real estate, which remains comparatively less affected. Real estate is considered a smart investment owing to its stability and predictability.
Things to Consider When Investing in Real Estate
When investing your hard-earned money in real estate, it's vital to consider certain points to maximize the return and minimize the potential risk involved. Here are some of the tips you should consider:
Proper property selection: The key to a successful real estate investment is the right selection of the property, which can fetch better appreciation and consistent short-term and long-term income.
Explore different financing options: Explore varied financial options to maximize the return by saving on tax and maximizing deductions.
Maintain record: Maintain a record of every transaction of income and expenditure related to the property to claim tax exemptions.
Seek professional advice: It's advisable to seek help from a financial expert for a better investment strategy and also to understand the risk and complexity associated with the investment.
Disadvantages of Real Estate Investment
Just like any other investment, real estate too has some disadvantages which we discuss below.
High initial investment: Unlike many other investments (stocks and bonds), real estate investment requires a huge initial investment, creating a buzz among potential investors. Arranging for a down payment becomes a challenge for many.
High operating expenses: Real estate requires high maintenance, adherence to local laws, the cost involved in hiring an expert, and many more, adding to the operating cost.
Potential damage to the property by renters: There are unseen issues arising with many renters. Some of the renters cause damage to the property, whereas others don't pay rent on time. All these factors contribute to problems.
Market risk: Though real estate is less prone to economic conditions, major changes in the market, such as less demand or political instability, may have a huge impact on the value of the property.
Conclusion
Real estate investment is one of the best ways to maximize your savings. There are multiple ways to invest; however, consider all the factors affecting the return on investment, like property selection, financial options, etc. The different options to invest are discussed in this article which may help you understand the benefits and disadvantages for an informed decision.
