Is investing in real estate worth it?
With the cost of living rising, you aren’t the only one looking into alternative ways to make your money grow. Using real estate investment properties to generate rental income has long been promoted as a method to generate inflation-resistant cash flow — but is it worth the effort?
Because this is a multi-faceted question, we’ll break down the reasons why real estate investors choose to flip homes, hold rental properties, and more to generate income.
Is real estate a good investment?
There isn’t one official path to take to make your money grow in the real estate market. While some investors may put their money into stocks and bonds, others may prefer the benefits of passive group investments or real estate rentals.
No matter what path you take, the small choices, such as when to buy, how long to hold a residential property, and how much cash to invest — they all matter. You can maximize your chances of succeeding when you work with a real estate agent, financial expert, and tax professional.
When you enter real estate investing with the right tools, it can be one of the most accessible options with great potential to grow. However, going into this venture without the right knowledge and support can negatively impact your potential return on investment.
If you do plan on using real estate as investment opportunities, then you should work with professionals who are expert in your desired asset classes. Whether you want to work with residential or commercial real estate, apartments or single-family homes, good advisors can give beginners the best start.
Reasons to Invest in Real Estate
When you put your money into real estate, it’s essential to understand all the benefits and considerations about this investment option. Every type of investment has risks, so knowing how to minimize them and capitalize on their strengths is key to success.
When it comes to real estate, knowing the state of the housing market, when to invest, where to buy, and how much you can afford is essential. Here are some reasons why real estate investing has been one of the most popular ways to build wealth. Here are some benefits of real estate investment.
1. Home Value Appreciation
Despite market fluctuations that include recessions, home prices have consistently trended upward. This graph shows data collected about home prices since 1953, which have risen significantly over time. This means that a typical property owner’s net worth will continue to rise over time. Home prices do rise and fall, but they have been proven to appreciate over the long run.
- TL;DR: If you buy and hold investments, you can safely bet on appreciation working in your favor when you follow best practices such as using due diligence and choosing the right types of properties for your budget.
2. Rent Can Be Inflation-Proof Income
Since rent and home prices historically increase, you can safely predict that income from renters will rise with the cost of living, unlike pensions or social security checks. As the cost of living rises, market values for rentals will also rise.
This rise in rent is evident in the median gross rent data collected by the U.S. census. For data beyond the year 2000 (wasn’t rent cheap back then?) consult HUD or, for quick reference, this full list post from iPropertyManagement’s blog.
The less you owe on the property, the better it is for your personal finances. In light of some pretty staggering rises in the cost of living, having a hedge against inflation is going to be more important than ever in your golden years.
3. Excellent Tax Breaks and Deductions
The IRS is good at incentivizing real estate investment through various tax benefits that help investors save money, such as:
- Allowing property depreciation to factor into your taxed income.
- Deferring capital gains with a 1031 exchange to get a property that aligns with your changing needs.
- The ability to deduct state and local real estate taxes, home mortgage interest, property management fees, maintenance costs, and mortgage insurance premiums.
- If you meet specific requirements under the Tax Cuts and Jobs Act, you may use a pass-through deduction, which allows you to deduct up to 20% of your QBI (qualified business income).
4. You Can Build a Legacy
Implementing innovative investment strategies maximizes your chance to build wealth, which means you can have something to pass on to the next generation. If you decide to buy and hold real estate, you can potentially see your wealth grow when you keep properties for decades. Short-term strategies like flipping homes can also become a lucrative income-producing venture.
If you pass owned properties on to loved ones, they get mortgage-free investments with far less risk than mortgaged properties. This is one way to create intergenerational wealth in your family, which can benefit you and your loved ones for many years!
How to Minimize Risks
A large part of making a profit in real estate comes from avoiding some common pitfalls. These precautions have saved investors a lot of grief and made the most of each investment.
1. Diversify Your Investments
If you invest in only one asset class or one area, you can lose money if it fails. But if you invest in different types of real estate in different markets, you can still have thriving properties even if another investment is in decline. In fact, diversifying your portfolio can reduce your risk by 60%-94% in U.S. markets. You may decide to diversify your real estate portfolio in these ways:
- Location/market
- Zoning
- Price
- Building type
- Active or group investments
Note: Don’t worry if you can only afford one or two investments now. Real estate usually has less volatility than other investment types and provides better returns. If you choose to stick to a small portfolio, it’s best to hold properties that have evergreen appeal, such as an affordable single-family rental or apartment.
2. Use a Property Manager for Rentals
Hiring a property manager can greatly reduce your risk if you plan to lease properties, and you need 100% assurance that you’re covering your bases. These professionals will handle all resident care, financials, marketing, inspections, and repairs. Here are the ways a property manager maximizes your chance to profit.
- It helps you avoid lawsuits from application discrimination. This can happen in seemingly harmless ways. For example, an inexperienced landlord may think it’s okay to hand-pick applicants. However, the Fair Housing Act ensures you can only reject applicants based on specific criteria, such as missed payments and low credit scores.
- Protects you against application fraud: Proper resident screening processes also run through applications with a fine-tooth comb, making it easier to identify application fraud. On the other hand, experienced scammers can trick a DIY automated screening program with false data.
- It frees your time so that you can expand your portfolio. You can even work full-time when you hire a property manager to handle your investments!
3. Participate in Indirect Real Estate Investment
If you don’t want to be hands-on, you can still put your money into a real estate investment. When you choose to go into indirect real estate investing, you aren’t a direct owner. Instead, you pool money into a property with other investors and get a percentage of the profits via passive income. A management company will take care of all the details while you collect a check.
4. Get into Real Estate Investment Trusts (REITs)
Another way to be hands-off with real estate is to collect distributions from Real estate Investment Trusts (REITs). This program was created in the 1960s to give everybody access to real estate investment. You can buy and sell REITs on major stock exchanges and earn money back when the asset is doing well. To learn more about REITs, check out Investor.gov.
Is investing in real estate worth it?
As you can see, there are many benefits to owning real estate. When you partner with a nationwide brokerage like Marketplace Homes, you can minimize risks by hiring property managers and getting timely advice on acquisitions and dispositions. Whether you’re a novice investor or an experienced one, we have real estate agents ready to help you find your next ideal property.
