Real estate investing remains one of the most popular avenues for building wealth. It offers financial benefits that can lead to significant economic advantages. The financial perks of investing in real estate can make it a valuable component of any investment portfolio. Alonderay Johnson will discuss the key financial benefits that attract people to this lucrative market.
Generation Of Passive Income
Passive income requires little to no effort to earn and maintain, typically derived from rental properties. Investors purchase residential or commercial properties and rent them out, which generates a steady, ongoing income stream.
This passive income can often cover the costs of the mortgage, property management, and taxes, while still providing positive cash flow to the investor. Over time, as rents tend to increase with inflation, the income can also grow, enhancing the investor’s financial stability.
Appreciation Of Property Value
Real estate appreciation is influenced by factors such as market demand, location, and improvements to the property and its surrounding area.
As the value of real estate property increases, so does the potential profit for investors when they decide to sell. This capital gain is a significant draw for real estate investors, providing an opportunity for a large lump-sum income upon the sale of the property.
Leverage
Real estate is unique among investments in its access to leverage. Leverage involves using various financial instruments or borrowed capital—such as mortgages—to increase the potential return of an investment.
For example, an investor might purchase a property worth $100,000 by paying only 10% ($10,000) as a down payment and borrowing the remaining 90%. If the property’s value increases to $120,000, the investor stands to make a significantly higher return on invested capital after paying off the debt.
For Alonderay Johnson, this makes real estate an attractive option for those looking to expand their portfolio without tying up large amounts of cash.
Tax Advantages
Investing in real estate comes with various tax benefits. The IRS allows property owners to deduct reasonable costs of owning, operating, and managing a property. This means that expenses such as interest on the mortgage, property taxes, operating expenses, depreciation, and repairs can all reduce the investor’s taxable income.
Particularly, depreciation can create a sizable deduction, as it allows the costs of buying and improving a property to be deducted over its useful life, despite the actual increase in market value during that time.
Inflation Hedging
Alonderay Johnson states that the natural relationship between real estate and inflation makes it a good hedge against rising prices. Historically, as inflation increases, so do property values and the amount landlords can charge for rent.
Thus, real estate investments have typically matched or exceeded the rate of inflation. This is not just beneficial for protecting the buying power of cash flow but also enhances the real value of the property over time.
Diversification
Lastly, real estate provides an excellent opportunity for portfolio diversification. Because real estate market cycles differ from those of other financial instruments such as bonds and stocks, adding real estate to an investment portfolio can reduce risk and increase returns.
For that, real estate has a low—and in some cases negative—correlation with other major asset classes. This means when stocks are down, real estate is often up, and vice versa, which can stabilize a portfolio’s returns over time.
