While the stock market has certainly bounced back from its 2009 and 2010 numbers, we’re still seeing wild fluctuations at times. Meanwhile other investments, like savings accounts, are still sitting at nearly zero percent interest. So once you’ve saved for an emergency fund and have six months of living expenses in the bank, it might be worth checking out other options before you dutifully put your money into “standard” investment opportunities like the stock market. If you’ve always heard that real estate is risky and that the stock market is the safe way to go, here are four advantages of investing in real estate that might make you change your mind:
1) Real estate prices rise with inflation. Rental rates and home prices rise with inflation, both of which are helpful when you plan to rent the property and then sell it down the road. While the stock market has also been shown to rise with inflation, the gains are typically not as high and the correlations not as direct as with real estate.
2) Tax benefits abound. You receive tax benefits when you rent your home as well as when you sell it. While renting, you can deduct the mortgage interest, operating expenses, property taxes, insurance and depreciation. Plus, when you sell real estate, you can defer capital gains by buying another investment property within a certain amount of time. When you sell stock, you pay capital gains tax no matter what you do with the profits.
3) Profits are flexible. If you’re charging more for rent than your monthly mortgage payment, you’ll have liquid cash to use as you please each month. While some of this should be set aside for repairs and general maintenance, saving the rest of it can give you great flexibility with cash or the opportunity to continue investing in more real estate. Many real estate investors wanting to cash flow their projects start with small homes and continue to rent and sell until they work their way up to being able to cash flow much larger homes or multiple homes.
4) Rental income provides two sources of income. When you purchase property to rent, you receive rental income PLUS additional income when it’s time to sell. It’s the only type of investment where you can borrow money to make the purchase, have it then it produce cash flow from rental income which you can then use to pay off the debt. Plus, when it’s time to sell, you’ve made even more money!
Of course you still have to be smart about your choices. Work with trusted professionals if this is your first time investing in real estate and start small with plans to build your portfolio over time. Making small and deliberate choices to invest in real estate over time can mean a huge payoff for you in the end!