Portfolio diversification is key. Putting all your eggs in one basket can lead to a quick loss. But when you invest some funds in the stock market, some in bonds or ETFs, and some in real estate, you increase your chances of higher earnings and fewer losses.
Many avoid real estate investments because they’re scary or require a lot of money. Both are false, and here are eight good reasons to invest in real estate. Content Cincinnati Real Estate for any questions if you want to buy real estate property in Cincinnati.
Why real estate is a good investment
You’re about to start one of the best investment journeys of your life if you invest in real estate. Here are the top reasons to invest even if you’ve never done so before.
You can invest wisely
Not many investments allow you to invest in assets worth much more than you have. If you have $10,000 to invest, you can buy $10,000 in stock. You can invest on margin if you’re an accredited investor with a high net worth.
You can invest in real estate for a fraction of the cost. Say you found a $100,000 home; if you put down $10,000, you could find a loan to finance the rest if you have good credit and a stable income.
You can own an asset for 10% of its value. Over time, as you pay down the mortgage, you’ll hold more of the investment, increasing your rate of return not only by paying down the mortgage but also by the natural appreciation of real estate.
You can force gratitude
Unlike stocks or bonds, real estate can appreciate. It sounds strange, but it’s true.
First, real estate appreciates naturally. On average, real estate appreciates 3% – 5% a year with only maintenance. But renovations and repairs can boost property value.
If you’re renovating to increase your home’s value, work with a licensed appraiser or real estate agent to determine the best (most valuable) renovations to make.
Some renovations can return 80% – 90% of your investment.
The renovations can be minor. Of course, adding a room or finishing the basement will add more value than cosmetic renovations, but even minor kitchen and bathroom renovations can drastically affect a home’s worth.
Get tax breaks
Like any business owner, real estate investors can get tax breaks. If you own a home and rent it out, you run a business – you are the landlord.
As a business owner, you can deduct these costs:
The loan interest
Origination points
Upkeep costs
Decay (spread out over 27.5 years)
Property taxes, insurance, and HOA fees
Always consult your tax advisor before writing off expenses, but real estate investing is a plus. If you invest in stocks or bonds and sell them for less than you paid, you can deduct capital losses.
Regular Cash Flow
If you buy and hold real estate, you can earn monthly cash flow by renting it out. This increases your profits since you’re not just relying on appreciation but also on rental income.
Many resources are available to help you buy investment real estate, find tenants, and manage the property.
The Roofstock Marketplace is great. They list investment homes for sale, and many already have tenants. You become a landlord when you buy a home. Roofstock researches so you can buy the best property.
Tenants defaulting or leaving early is a risk, but so is every investment. Risk is needed for reward.
You may be financially safe
When investing, there’s little security. As 2020 showed, it can change quickly. One minute you have a big investment, then you lose it all.
When you invest in real estate, you have an appreciating asset. The housing may go through ups and downs, losing value, but it usually recovers if held long enough.
Many retirees invest in real estate for extra income. Whether you own the property while you’re retired to supplement your income or you sell a property you’ve owned for years and make a profit, you’ll increase your retirement income.
Some people feel more secure with their money in real estate than in a cash account or stock market.
Many ways to invest in real estate
If buying and renting real estate is too stressful, there are other ways to invest.
Buy a bargain, fix it up, and sell it (fix and flip)
Act as a wholesaler between motivated sellers and a network of buyers.
Use house hacking to buy a 1 – 4 unit property, live in one, and rent out the others to pay your mortgage.
Buy a REIT
You can give real estate to heirs
If you want to leave a legacy but don’t like cash, real estate may be better.
Not only will you give your heirs an income-producing asset, but they will also appreciate it. So they can keep the property to continue the legacy or sell it for profit.
Use equity to expand your real estate portfolio.
Real estate investing is a popular way to use investment property equity. Consider a home with $50,000 equity. You can refinance it, take out $50,000, and put it toward your next home.
Depending on the value of your properties, you may be able to pay cash for future properties, boosting your portfolio’s equity.
How do you choose a good real estate investment?
Everyone wants to know what property makes the most money to invest in. While there’s no one-size-fits-all answer, there are specific attributes to look for when investing in real estate, including:
Look for a renter-friendly or fast-appreciating area.
Ensure the area has all the amenities homeowners want.
Crime, school ratings, and tax history should be considered.
Invest in homes renters want (1 unit, townhome, condo, etc.)
Please look at recently sold homes to determine the average sales price and compare it to historical data.
What are real estate’s downsides?
Real estate has pros and cons like any investment. Understanding the ‘downsides’ can help you choose. You may still want to invest, but knowing the risks can help you make smarter choices.
There’s no promise
There’s no guarantee a property will appreciate or make money. Many things affect what happens, including the economy, housing demand, and local events.
Like most investments, real estate usually pays off. If you’re in it for the long run, you should make money.
A landlord’s job is time-consuming and tiring.
You must be a certain type to be a landlord. If you buy and hold real estate, you should rent it out. If being a landlord is too much, hire a property manager.
When you buy from Roofstock Marketplace, they help you find a property manager. Because most Roofstock users buy real estate out of state, this is a useful resource. They can invest in property without managing it themselves.
Harder to get financing
Financing an owner-occupied home is easy with good credit and steady income. You’ll need a small down payment and can get the rest in a fixed- or adjustable-rate loan.
When buying a home to rent out or fix and flip, lenders are less generous. They have higher credit scores, lower debt-to-income ratios, and larger down payments. Many lenders require 30% down on a home even with good credit.
Cashflow isn’t guaranteed
You can’t guarantee tenants. If your tenant leaves, the mortgage and other costs are yours. You must pay your mortgage even if you don’t have rent.
You’ll need a solid emergency fund and stable finances to handle any situation.
In sum
Investing in real estate diversifies your portfolio. High-risk investments, like stock market money, can be hedged. If you invest in rental homes, you can enjoy cash flow while the home appreciates, giving you significant capital gains during retirement.
Real estate is liquid if needed. Don’t invest money you’ll need soon, but know you can liquidate property investments within a few months if needed. Roofstock Marketplace is a great place to sell investment properties to other investors, helping you reach your financial goals.
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