Real estate investment can be an excellent addition to your investment portfolio, yet requires significant time, resources and costs if done incorrectly.
Real estate can give investors peace of mind unlike any other investment can. It has withstood interest rates, market fluctuations and technological innovations alike – offering security that other investments don’t.
Real estate can play an invaluable role in diversification and inflation hedging when included as part of a balanced investment portfolio. According to studies, including real estate can reduce risk by 10-20% depending on an individual’s goals and risk tolerance.
Diversifying in real estate investment means diversifying both debt and equity properties as well as various property types – for instance single family homes, multi-unit complexes and commercial properties can all be purchased as investments for diversification purposes. Investors also have the option to invest in both new construction projects as well as redevelopment efforts.
Rebalancing real estate portfolios is crucial to reaching desired diversification levels, and many investors depend on operating partners such as Arrived to help manage and diversify their portfolios across geographies, product types and operators.
As a property investor, you can enjoy tax advantages in many forms. Beyond deducting mortgage interest payments, other expenses associated with property acquisition such as title insurance premiums, real estate agent commissions and back taxes may all qualify for deduction. Plus capital gains tax relief could offset up to $3,000 of income tax when selling these investments!
Another significant tax advantage is using a 1031 Exchange to defer capital gains taxes by using proceeds from selling one property to purchase similar ones of equal value, providing investors with another method to expand their portfolio and increase returns. This strategy can provide significant tax benefits.
Finally, rental properties don’t qualify as earned income and don’t fall under FICA (the Federal Insurance Contributions Act). This could save up to 15.3 percent in taxes depending on how you structure your investment company or property management company legally.
Cash flow is one of the major advantages of real estate investment. This refers to the difference between income and expenses related to owning and operating a property such as mortgage payments, insurance premiums, utilities bills, maintenance costs and management fees. A property generating positive cash flow means its rent payments exceed ownership costs or debt service obligations resulting in greater returns than cost-of-ownership fees and debt service obligations.
Numerous investors can gain capital gains through property values increasing. Investors can capitalize on this by selecting locations with projected population increases or near universities or large businesses where demand will likely be high.
Purchase properties with low property taxes is one way for investors to increase income. One effective strategy for doing this is finding multiple-unit buildings such as duplexes, triplexes or quadplexes that share adjacent lots. When this occurs, city authorities often allow a legal separation process which gives you additional cash that you can put towards property improvements or further acquisition.
Leverage in real estate investments is often an emotive topic of debate among investors, with some cautioning against its risky use. If income doesn’t cover mortgage payments and expenses, then investors may face foreclosure; this risk becomes especially problematic if the economy declines or property values decline.
Leverage can be an incredibly effective tool to enable investors to expand their portfolios rapidly without investing all of their own cash into every deal. Kathy Fettke of RealWealth describes it like using a car jack to lift heavy items that would be impossible for one person alone to carry alone.
But it’s important to keep in mind that not all leveraged properties offer equal rates of return as all-cash investments; this ultimately depends on initial investment, monthly expenses, and cash flow in place – taking these factors into account can enable real estate investing to provide high ROI returns.