There isn’t one official path to take to make your money grow in real estate. While some real estate investors may put their money into stocks and bonds, others may prefer the benefits of passive group investments or real estate rentals.
No matter what path you take, the small choices, such as when to buy, how long to hold, and how much cash to invest, matter. Among your choices, real estate investing is one of the most accessible options with great potential to grow. What are the reasons you should invest in real estate, and how can you get on board?
Reasons to Invest in Real Estate
When you put your money into real estate, it’s essential to understand all its benefits and considerations. Every type of investment has risks, so knowing how to minimize them and capitalize on their strengths is key to success. When it comes to real estate, knowing when to invest, where to buy, and how much you can afford is essential. Here are some reasons why real estate investing has been one of the most popular ways to build wealth.
Appreciation
Despite market fluctuations that include recessions, home prices have consistently trended upward. This graph shows data collected about home prices since 1953, which have risen significantly over time. Home prices do rise and fall, but they have been proven to appreciate over the long run. Rent prices have also steadily increased, which is evident in the median gross rent data collected by the U.S. census. So, if you buy and hold investments, you can safely bet on appreciation working in your favor.
Inflation-Proof Income
Since rent and home prices historically increase, you can safely predict that income from a rental will rise with the cost of living, unlike pensions or social security checks. As the cost of living rises, market values for rentals will also rise. The less you owe on the property, the better too, so it only gets better in time.
Excellent Tax Breaks and Deductions
The IRS is good at incentivizing real estate investment through various tax benefits that help investors save money, such as:
- Allowing property depreciation to factor into your taxed income.
- Deferring capital gains with a 1031 exchange to get a property that aligns with your changing needs.
- The ability to deduct state and local real estate taxes, home mortgage interest, property management fees, maintenance costs, and mortgage insurance premiums.
- If you meet specific requirements under the Tax Cuts and Jobs Act, you may use a pass-through deduction, which allows you to deduct up to 20% of your QBI (qualified business income).
Build a Legacy
Implementing innovative investment strategies maximizes your chance to build wealth, which means you can have something to pass on to the next generation. If you decide to buy and hold real estate, you can potentially see your wealth grow when you keep properties for decades.
If you pass these properties on to other loved ones, they get mortgage-free investments with far less risk than mortgaged properties. This is one way to create intergenerational wealth in your family, which can benefit you and your loved ones for many years!
How to Minimize Risks
A large part of making a profit in real estate comes from avoiding the common pitfalls. These precautions have saved investors a lot of grief and made the most of each investment.
Diversify Your Investments
If you invest in one asset type, you can lose money if it fails. But if you invest in various real estate assets, you can still have thriving properties even if another investment is not. In fact, diversifying your portfolio can reduce your risk by 60%-94% in U.S. markets. You may decide to diversify your real estate portfolio in these ways:
- Location/market
- Zoning
- Price
- Building type
- Active or group investments
Note: Don’t worry if you can only afford one or two investments now. Real estate generally is less volatile than other investment types and provides better returns. If you choose to stick to a small portfolio, it’s best to hold properties that have evergreen appeal, such as an affordable single-family rental or apartment.
Use a Property Manager for Buy and Hold
Hiring a property manager can greatly reduce your risk if you plan to lease properties, and you need 100% assurance that you’re covering your bases. These professionals will handle all resident care, financials, marketing, inspections, and repairs. Here are the ways a property manager maximizes your chance to profit.
- It helps you avoid lawsuits from application discrimination. This can happen in seemingly harmless ways. For example, an inexperienced landlord may think it’s okay to hand-pick applicants. However, the Fair Housing Act ensures you can only reject applicants based on specific criteria, such as missed payments and low credit scores.
- Protects you against application fraud: Proper resident screening processes also run through applications with a fine-tooth comb, making it easier to identify application fraud. On the other hand, experienced scammers can trick a DIY automated screening program with false data.
- It frees your time so that you can expand your portfolio. You can even work full-time when you hire a property manager to handle your investments!
Participate in Indirect Real Estate Investment
If you don’t want to be hands-on, you can still put your money into a real estate investment. When you choose to go into indirect real estate investing, you aren’t a direct owner. Instead, you pool money into a property with other investors and get a percentage of the profits via passive income. A management company will take care of all the details while you collect a check.
Get Into Real Estate Investment Trusts (REITs)
Another way to be hands-off with real estate is to collect distributions from Real estate Investment Trusts (REITs). This program was created in the 1960s to give everybody access to real estate investment. You can buy and sell REITs on major stock exchanges and earn money back when the asset is doing well. To learn more about REITs, check out Investor.gov.
Grow Your Real Estate Portfolio Today
As you can see, there are many benefits to owning real estate. When you partner with a nationwide brokerage like Marketplace Homes, you can minimize risks by hiring property managers and getting timely advice on acquisitions and dispositions. Whether you’re a novice investor or an experienced one, we have real estate agents ready to help you find your next ideal property.
Local Broker Information: https://www.marketplacehomes.com/real-estate-license-information/
Alicia Persson is a real estate content/SEO writer at Marketplace Homes. She has several years of experience working in real estate teams that specialized in investments and property management. Before she joined Marketplace, she was a freelance writer for 7 years, leading to a specialization in real estate and home living content for boutique digital marketing agencies. During her writing years, she learned the basics of SEO and gained experience writing for many different clients, making her highly versatile at creating diverse content.
She is a proud University of Virginia master’s graduate and enjoyed her undergraduate years at the University of Mary Washington. When Alicia is not writing, she plays keytar and sings in a local 90’s rock cover band, or she spends time with her amazing family.