4 Advantages to Investing in Real Estate
Thinking about real estate investing? Here are some of the top benefits:
Are you still on the fence about investing in real estate? Well, you shouldn’t be. Real estate has proven time and time again to be the most lucrative investment out there, much more so than stocks, businesses, Bitcoin, and niche investments such as art and gold.
If you are still unsure, however, let’s take a look at some of the many advantages associated with investing in real estate. Let’s look at basics first.
To start, real estate is considered a very safe investment; hence the reason why banks will almost always give out mortgage loans- people will always need a place to live. And because banks so frequently give out loans, real estate is one of the easiest things to invest in with no money. While those two things alone are enough reason for most people to take the plunge into real estate investing, there are even more advantages!
Now that we’ve covered the basics, let’s take a more in-depth look at four other advantages to investing in real estate from Robert Kiyosaki.
1. Cash Flow Every Month
If you open rental property, whether it be one or ten, your tenants are (hopefully) paying you rent every month. While you will still have to spend some money on overhead costs such as mortgages, maintenance, and incidentals (this includes the unfortunate instances when your tenants don’t pay rent), the rest of it will be positive cash flow for you- basically meaning it’s income straight into your pocket!
While the costs of real estate investing will be higher than investing in, say, the stock market, the returns will also be much, much higher. Instead of monitoring the market, watching it go up and down, all you have to do is rent your property and then watch as your passive income flows in.
2. Tax Advantages
Like I’ve mentioned many times before, being a landlord isn’t cheap (right off the bat, at least), but not only will you start to gain passive income, there are also a ton of tax advantages associated with real estate investments. Not only can you write off many of your overhead costs, but there are particular advantages that you get just by investing (source).
These include no self-employment taxes, the ability to refinance against what your current appreciation, and what are commonly referred to as “opportunity zones”: areas in the country that the government is attempting to stimulate economic growth and prosperity. In doing so, they offer tax incentives for the investors who wish to buy property there. There’s one tax advantage that is the strongest tool, however, and that is deprecation. We’ll look at that next.
So, we know that appreciation is the amount your house raises in value over time, due to location, improvements, and a host of other factors. So, obviously, deprecation is what your home is losing in value just by being lived in- otherwise known as normal wear-and-tear to your property. Rental properties have what many call a “shelf life”; even if you take good care of your home and consistently fix it up, there will always be some effect on the house that comes just from tenants existing in the home.
The good news, however, is that this is not only tax deductible, but probably where you will see your biggest tax advantage come from. Figuring out how to calculate your deprecation is relatively easy, as well: the IRS does a lot of the work for you.
Their “standard depreciation time” is 27.5 years, meaning all you have to do is take the full value of your home and divide it by 27.5. Once you have this number, you can deduct it every year from your taxes, lowering your income and therefore making the taxes that you owe significantly lower. Finally, something about taxes that is actually easy!
4. Capital Gains
The fourth and final advantage we are going to discuss is capital gains. Capital gains simply refer to the increase in an asset’s value. While, unfortunately, any capital gain you receive must be claimed on your yearly income taxes, there are couple things you can do to offset these costs.
First, know the difference between short-term and long-term capital gains (hint: you’ll want to shoot for long-term capital gains). Short-term gains, which refers to anything that you buy and sell within a year, is taxed as regular income. However, long-term gains, which refer to anything you own for more than one year, are subject to different tax brackets and typically cap out at 20%, and can even be 0%!
This is why we discuss real estate investment as opposed to buying and flipping houses. While flipping houses can be an easy way to make money fast, you will make more in the long run if you have the time and patience to invest in properties that you are able to rent out.
So, after reading these benefits, still on the fence about real estate investing? If you are, no problem. Using the advantages we just talked about, go online and find a house that you like for sale. Calculate how much you could make in rent, what your depreciation could be, and consider the tax benefits you will receive from your investment.
Now, hold that up to investments you could make in stocks. While it might seem like the cash return from stocks is a quicker one, the return from real estate investments will actually make you more money and grow you net worth as opposed to simply making a quick buck. It’s long-term profits and net worth growth you want to look for if your goal is to retire early or make a substantial passive income. And although it may be a little more work, real estate investing will come out on top every time.