Investing in real estate is amongst the best ways to earn a passive income, save for retirement, and build a diversified investment portfolio. It is one of the best forms of investment because you get to use other people’s money to pay off your initial investment while simultaneously increasing your monthly cash flow. Here are some of the reasons why investment can be beneficial for your portfolio:
Real estate investment can generate cash flow i.e. the net income from an investment after mortgage payments and operating expenses have been made. As you pay your mortgage, your cash flow strengthens. This helps in creating a stream of income.
Tax Breaks and Deductions
When you sell your property, you get a capital gain and earn a profit. Real estate also allows for several tax deductions, especially on your mortgage interest, property taxes, and property management fees.
Property value will also increase. Increased value means a sale and reinvestment in higher-value properties, or provide an equity line of credit to use for other investments. Rents also increase overtime, leading to higher cash flow.
Equity and Wealth
Every time you pay a mortgage, you build equity, so with each payment, you own more of the property. The value of your investment property increases, while the mortgage financing is reduced. This allows you to buy more property and hence increase your cash-flow and wealth.
The addition of real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk.
Real Estate Leverage
Leverage means that you can pay for something without coming up with the full cost. This makes you entitled to all benefits and builds equity. You can leverage your investment capital, mortgage financing, or your time.
Competitive Risk-Adjusted Returns
Real estate returns depend upon location, asset class, and management. Many investors aim to beat the average returns of the market, with an annual return of about 11%.
This is the positive relationship between GDP growth and the demand for real estate. The higher the economy, the higher the real estate and rents. This increases the cash flow, without increasing the property expense. Therefore, real estate controls the buying power.
Real Estate Investment Trusts
REITs allow you to buy and sell publicly-traded REITs on major stock exchanges. They can be traded under high-volume, meaning you can get into and out of a position quickly.
Paying down loans frees up more investment resources. The increased equity can then be used to free up funds and invest in other properties.
Depreciation allows you to deduct the value of an asset over its useful life. With real estate, you get to depreciate the value of the property, but overtime the value of the property increases. Consequently, you get tax deductions, to offset the income the property is producing, helping to save money over time.
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