5 Benefits of Investing in Real Estate. Investing in real estate is a great way to obtain cash flow and/or capital gains while you have someone else pay your mortgage, but there are also other benefits to investing in real estate.
1. Income Flow
Cash flow, the most obvious, is the income that is generated from the rental income after your expense have been paid. This is money going into your pocket every month — like an extra pay check — and this can increase over time as rent goes up with the market. Historically rental rates have gone up in Hawaii, so potential exists for your monthly cash flow to increase over time as rental rates rise.
2. Investment capital Benefits
Investment capital gains as well as appreciation is the raise in the price associated with the property after time. We have seen rates double in Hawaii a couple of times in the past and all you had to perform was to own the property to acquire advantage of this increase. It’s an added benefit of owning a real estate investment.
3. Leverage
Using leverage to invest in real estate is a benefit that cannot be attained with other investments. For example, when purchasing stocks it would cost you $200,000 to buy $200,000 worth of a particular stock. When purchasing real estate, you could purchase a $200,000 investment property but only need to pay cash for 20% ($40,000) of the total property price. If prices go up 5% in this scenario, the increase in value to both the stocks and the property is $10,000, but with the real estate purchase it only cost you an upfront investment of $40,000 to have the property value increase by $10,000, whereas with the stocks it cost you $200,000 to make the same $10,000.
Even if real estate is a high-cost investment, less out-of-pocket is usually required to purchase an investment. This all is determined by your borrowing accreditation with a financial institution. The amount of cash that each individual buyer will need to have on hand to acquire a property all depends on their personal borrowing qualifications having a financial institution, and the most important step is to talk to a loan representative to find out your buying power and to determined your options.
4. Inflation Resistance
On account of your month to month mortgage payment has limitations, there may be inflation resistance with real estate investment. Products and services go up in price, but your monthly mortgage payment does not. You could actually increase your income when you raise the rent over time for your renters and not for you.
5. Taxation Incentives
The not-so-obvious benefits are the tax incentives: depreciation, business expense deductions, investing tax-free with self-directed IRAs and my favorite, the IRC (Internal Revenue Code) 1031 Exchange.
In an IRC 1031 Exchange, an investor is able to sell their investment and buy other, like-kind investments, tax deferred.
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