In the investing world, there are two concepts namely diversification and asset allocation which involve spreading the investments around to mitigate risk while trying to get a higher return. A portion of a well diversified portfolio is named as real estate. Real estate investing is an investment strategy where an investor purchases property in order to earn a profit. In most cases, the investor will either rent out the property, or improve on it in order to resell it at a higher cost than it was purchase for.
Benefits of Investing in Real Estate
#1. Cash Flow
A big advantage of real estate is that it can produce cash flow on a monthly basis. the revenue generated from positive cash flow is collected in the form of rent minus the expenditure required to for operating the building. The cash-on- return investment is higher than any other investment and the reason behind this is leverage.
There is no investment which is more powerful than real estate and the ultimate power of investing is leverage. The leverage is based on the asset itself and the banks would issue loan up to 75-80 percent higher than the total asset value. One reaps the benefits of appreciation while leveraging an investment.
The benefits in real estate are best realized only after a long term as it takes time to appreciate in value. As the property is appreciating the residents would be paying the mortgage. Moreover the rental income too grows on a percentage annual basis.
#4. Hedge against Inflation
Real Estate is defined as a tangible asset which generally rise either at the rate of inflation or much higher. Over the years real estate has risen 5 percent per year which is higher than inflation. That too it is just appreciation which does not take into account cash flow generated, or the tax advantages such as depreciation, refinance, and tax deductible mortgage interest.
the tax payer is allowed depreciation as an income tax deduction to recover the cost of wear and tear on an annual basis. In case of real, estate, it is a non operational expense that can be an advantage during the tax time.
One can withdraw cash through refinance of the property which is also named as tax shelter. By refinancing a property you are restructuring your existing mortgage debt based on the added value of the property. This would allow investors to pull their initial investment out as the capital investment would be zero and would also create a cash-on cash return.
#7. Asset Protection
Whatever reason may be real estate is one of the few investments that can be insured and protected from damage. One can be able to claim losses for the actual value of the asset before the loss, and during the loss.
Another legal advantage is that it can also be placed into a limited liability company which helps in protecting both your personal wealth and assets.
Real estate cannot be traded by a click of a button as it is a physical asset like stocks. It takes more tortoises like approach; where slow and steady wins the race.