While an investment in the stock market relies solely on an asset’s value appreciation, an investment in real estate is known to be virtually inflation-resistant. As an attractive and stable income return, property investing provides a way for investors to diversify their portfolios by further enhancing risk-return profiles and lowering volatility.
The United States is one of the most secure countries for real estate investment today and with the economy beginning to reach pre-housing-bubble highs, it is certain that GDP growth and lower unemployment rates will further increase the demand for real estate nationwide. For investors who strive to be in control of their assets, property investing is a great hands-on approach to yielding impressive returns on a regular basis.
Better than the Stock Market
Unlike stocks or bonds, property investing gives you a tangible asset. You know exactly where your money is going, all while consistently collecting returns in the form of monthly rent payments from tenants. Over time, as additional money is invested back into the property itself, the potential for appreciation and rent increases is plausible, which is rarely — if ever — the case in the stock market.
This can be an extremely profitable venture for both part-time and full-time investors, as long as the property is managed and maintained well. Real estate is often a passive investment, because many investors hire a property management company to handle maintenance requests and issues concerning tenants. Many management companies also handle accounting and tax needs on behalf of investors. In such instances, investors have the ability to purchase investments out of state or even outside of the country.
Financing is Available
Contrary to stocks, property investing does not require an investor to use all cash to make a purchase. In fact, in most cases, it is more beneficial in the long run for an investor to finance the purchase. Strict lending standards that were put in place by banks and financial institutions in the midst of the housing bubble prevented many investors and home buyers from obtaining a loan or mortgage; people were obligated to make all-cash purchases during this time. Today, however, as the economy improves and lending requirements loosen making it a feasible option again, many people are turning to financing specifically for the benefit of leverage.
Perhaps one of the greatest advantages of property investing is the ability and capacity to use leverage as a way to increase cash flow – an option that is simply not available for stock or bond investments. At the time of purchase and throughout the duration of an investment, leverage allows for higher returns to be achieved consistently through rental real estate. An investor can use the additional monthly income from rent payments to easily pay down their mortgage and any other related expenses. Similar to purchasing a home to be used for your personal residence, a 20 percent down payment is usually standard, however, some financial institutions offer lower down-payment options for borrowers.
Besides the gains from appreciation and the ability to use leverage, property investing also offers investors a substantial amount of tax deductions that can be used to their advantage. Unlike tax laws that pertain to and thus affect other ordinary forms of income, the profit that is made from a real estate investment can lower an investor’s annual tax return. Stocks and bonds, however, are not allowed such tax advantages.
Probably the most common tax deduction, depreciation, depends greatly on the determined useful life of the asset and condition of the property, building, or home itself, taking into consideration any restorations or improvements that may have been made. Along with depreciation, real estate investors can benefit similarly from capital gains profit once an asset has been sold. As long as the asset has been held for at least one year, the maximum long-term capital gains tax is applicable for rental real estate at a reduced rate of 15 percent. There is no limit to the amount of investment income that is subject to this rate, nor number of times it can be used. Although real estate is generally a long-term investment, when a property is sold, this reduced capital gains tax is something to learn about and be aware of.