More than a century ago, billionaire Andrew Carnegie quipped that 90% of millionaires made their wealth through real estate.
While not entirely factual, the point was real estate might be one of the most lucrative, popular, and reliable investment options that could yield a high return on investment.
So, does real estate still hold its sway? Plenty of millionaires today think so. According to the S&P 500 Index, commercial real estate has the lowest return on investment (ROI) at 9.5%, residential real estate at 10.6%, and REITs at 11.8%.
This article will explore why investing in real estate is still a smart move.
1. Real estate value tends to rise over time
When you buy a property and hold on to it for a while, it will usually increase in value. Although economic downturns like the 2008 housing market crash will cause its price to drop, it will hold its value over time. Indeed, the average cost of a home has increased by nearly 30% over the past decade.
Moreover, investors may force an increase in the value of a property using strategies like renovations and improvements, in contrast to stocks and bonds.
Whether buying a property for a bargain and fixing it up to resell (home flipping) or renovating a rental unit, you may get a higher return on your money more quickly than it would through natural appreciation.
2. Provides steady cash flow
Real estate investment is excellent for anyone seeking a steady cash flow. Entrepreneurs can lease out the property for steady cash flow, besides the appreciation in value that it may bring in the long run.
Most landlords adhere to the 1% rule, charging a monthly rent equivalent to 1% of the home value. In short, if the property is worth $200,000, rent it out at $2,000.
3. Relatively safe form of investment
Compared to the traditionally volatile investment options such as the stock market or forex trading, investing in real estate is relatively safe.
First off, you get a tangible asset that has intrinsic value. There are traditional real estate investments such as land, single-family homes, and small multifamily properties that you can own outright.
Some other viable options include crowdsourcing, joint ventures, real estate investment trusts (REITs), and United States Property Coin (USPC). These are suitable for entrepreneurs who want an alternative form of real estate investing that does not entail owning and managing physical properties.
Because of inflation’s adverse effects, modern currencies are a poor way to keep wealth. The USPC aims to address this by establishing itself as the world’s leading digital currency backed by real estate assets.
Investors will have a solid option in USPC as it has the potential to appreciate over time, whereas other asset-backed tokens are prone to devaluation.
4. Tax and financial benefits
There are several financial and tax benefits to investing in real estate:
- Tax benefits include deducting owner and operating expenses, capital gains deferral, avoiding FICA tax, and depreciation deductions.
- Income from rental property is treated as ordinary income.
- Mortgage interest deductible.
- Defer capital gains tax if you conduct a Section 1031 deferred exchange.
- You may qualify for a pass-through deduction.
5. Helps diversify your portfolio
Investors who diversify their portfolios tend to fare best over time. Including real estate in a diversified portfolio can reduce overall portfolio volatility and increase return-per-risk.
Real estate itself has many industries that react differently to market forces. For instance, while demand for offices and malls tumbled during the pandemic shutdowns, demand for storage warehouses soared due to the explosion of the e-Commerce industry.
6. It is an inflation hedge
The great thing about real estate is that, like any other tangible product, it will increase in value with a rise in inflation. Moreover, most of the time, real estate appreciation outpaces inflation, resulting in a profit for the owner.
That makes it the best hedge against inflation, unlike the stock market, which typically nosedives when there is raging inflation.
7. You can earn passive income
You can start earning money by purchasing real estate while doing nothing noteworthy. If you own rental properties, you receive a steady monthly income, whether you actively manage the property or have employed others.
Entrepreneurs in other forms of real estate investing like REITs, crowdfunding, and USPC don’t even have to worry about property management.
8. It allows you to build wealth and equity
Paying off a mortgage gives you access to the equity in your property, which is an asset that contributes to your net worth. Real estate acts like a store of wealth, allowing you to grow your wealth by accumulating equity you can use as leverage against future property purchases.
Real estate investing is still a viable form of investment. While it is harder to liquidate a real estate property, there’s no denying that it is a relatively safer investment option than stocks.
Investing in real estate is also great during times of high inflation since it will also rise in value. You also earn plenty of tax benefits, and it is a great way to store wealth.