Residential real estate investment is a tested and trusted way of enjoying financial stability while building long-term wealth. Most new investors often wonder, “Why is real estate important.” Unlike other investment vehicles, rental property investing helps protect against inflation and offers the potential for regular cash flow alongside long-term appreciation.
Also, real estate investing offers investors tangible assets they can leverage to build equity and generate more income over time. While buying a real estate property requires a substantial initial investment, residential property buyers have access to many financing options, making it an excellent choice for many investors, unlike commercial real estate.
This article answers the question, “Why invest in real estate“? We’ll discuss five top real estate benefits and types of residential properties. Whether you’re a first-time home buyer or a serial investor looking to venture into rental property investing, you’ll find all you need to know about investing in real estate by reading to the end.
5 Reasons to Invest in Real Estate
Real estate investment is one of the most lucrative and safe investment options for many reasons. Its benefits range from the regular positive cash flow when you invest in rental properties to the long-term appreciation potential.
Here, we explain the top 5 reasons to invest in real estate:
1. Build Equity and Grow Your Wealth
One great advantage of real estate investing is the power to build equity. When you purchase a real estate property, it’ll naturally increase in value while paying down the mortgage, allowing you to build equity.
As an asset, equity is one simple way to generate wealth. A report from FRED shows that homeowner equity value from 2011-2022 almost tripled. Therefore, with equity, you can enjoy a return on investment (ROI) and generate cash flow in many ways.
You can also decide to sell the home when house prices are high and enjoy a significant profit. Alternatively, you can increase your investment portfolio by leveraging equity.
Furthermore, you can purchase a rental property with equity from an existing real estate property to generate monthly income while doubling your profits from equity building.
2. Tax Benefits
Beyond the money you can make from rental properties and real estate sales, investors enjoy more uncommon real estate advantages like tax benefits. For example, depreciation expenses from income properties help homeowners significantly lower their property’s taxable income (it can be eliminated sometimes).
Other tax deductions on rental properties include:
- Improvement, maintenance, and repairs
- Property management
- Mortgage interest payments
- Insurance payments
- Homeowner association fees
- Loan origination fees
- Advertising and marketing
Other options, like the Internal Revenue Code’s Section 1031, allow real estate investors to maximize tax savings. Section 1031 enables home buyers to postpone paying property taxes when they sell their home by using the fund to buy a similar property.
Since these laws are complex, it’s crucial to research them to understand how they work and their impact on your finances before buying your first investment property.
3. Passive Income
Of all the benefits of property investment, passive income takes the lead. Besides the constantly appreciating property value, rental properties generate regular monthly cash flow whether the owner employs property managers or handles the management themselves. The ability to earn from your property investment without dedicating too much time to it provides freedom for property investors.
Properties don’t generate money automatically without an owner putting in extensive work. Finding and evaluating an investment property, getting funding, marketing the rental listing, maintaining the house, and managing the tenant takes time.
However, the process can become stress-free and simple with a good property management tool or company. You can also enjoy passive income by investing in a real estate investment trust (REIT).
Besides the financial benefits of real estate investing, some people venture into real estate as a side hustle due to its flexibility.
Real estate investing also appeals to entrepreneurial people due to the different investment options available. For instance, you can choose to buy a commercial property, start real estate holdings, or flip houses, depending on the real estate market in your location.
You can also become a landlord and own income properties to outsource to a property manager if you can’t handle the management or become a land developer.
5. Easy Financing
If you’re wondering, “Why should I invest in real estate? It’s an asset class that’s easy to finance, unlike the rest. For instance, you can borrow 50%-90% of the property acquisition cost and enjoy interest rates below the anticipated return on investment rate.
The average interest rate in 2022 is 4.73%, while the mortgage interest rates have been below 7% for nearly 15 years. Alternatively, you can get more than 15% ROI on investment properties. However, an investment property’s ROI can vary significantly for many reasons.
Therefore, ROI isn’t the only method or calculation for defining your profit. Depending on the property type, you can also rely on the cash-on-cash returns and cap rate to calculate your profit.
Other reasons to invest in real estate include paying a small down payment as an initial investment cost, unlike in stock investing where you invest the entire amount. For instance, when investing $350,000 in the stock market, you’ll need to put in the total amount. However, a good mortgage loan can help you invest in a $350,000 income property with a $70,000 down payment.
The lender will put 80% of the property value for the investment while you enjoy the profits from the rental property. All you need to do is agree on a monthly mortgage payment and use rent payments from the property to repay the mortgage.
If the $70,000 property investment and $350,000 stock market investment appreciate simultaneously, the real estate property will return a higher profit since the initial investment cost was significantly lower.
Types of Residential Real Estate
Residential rental property is a home an investor buys to lease to tenants. These properties are zoned only for households or individual homes, ranging from large apartment buildings to single-family residences.
Unlike a commercial property situated in areas zoned for leasing to businesses for profit generation, a residential property is strictly built for people to live in.
The following are the top five residential rental properties to know:
Apartments are the most common housing type in major cities. They often come fully furnished with electrical components, fittings, paints, and fixtures. Residents can enjoy access to extra amenities like open spaces, sports facilities, recreational amenities, clubhouses, and greenery if the apartment is part of a residential complex.
Single-family homes are also another common type of residential building. These properties are independently built with their own parking space and lawn. They’re standalone buildings and may be cheaper than apartments depending on the size and location.
Townhomes are individual dwelling units found in a multi-unit complex. While a typical townhome is smaller than a semi-detached or detached building, its living space is bigger due to its multiple floors, compared to condominiums.
Townhomes are historic urban dwellings, with many older ones found in big North American cities. While investors have limited options for building a new townhouse, you can buy a pre-construction unit from a larger development. However, you might be unable to customize your property beyond the interior.
Unlike apartments, condominiums are properties you can easily own. This type of real estate is perfect if you’re looking for budget-friendly accommodation with few repairs and minimal landlord responsibility.
Like townhomes, you can own a pre-construction condo unit in a multi-story building by buying from a developer. Being the first unit owner ensures you don’t have to deal with many repairs and renovations. Also, a new condominium unit comes with lower maintenance fees from the property management company.
Villas are luxury homes with cutting-edge amenities, lawns, and backyards in a gated community. This type of property offers all the residential single-home features with more modern luxury fixtures.
Besides being costlier than the other property types mentioned here, villas also offer more privacy depending on the location. You can even turn them into a vacation home, rent them out when you aren’t vacationing, and enjoy passive income.
Why Is Real Estate the Best Investment?
One of the reasons why investment in real estate is the best is because it offers benefits like tax breaks, stable cash flow, the ability to leverage equity, and long-term appreciation in property values, unlike investing in stocks and mutual funds.
Also, owning rental properties serves as a physical asset, offering a sense of stability and security. However, before investing in an income property, check your risk tolerance, investment goals, and financial situation.
Can Investors Enjoy Private Equity in Real Estate?
Yes! Property investors can enjoy private equity by investing in a privately-traded real estate investment trust (REIT) or private real estate funds.
Private equity offers access to large-scale investment opportunities and potentially higher returns through passive options like real estate investment trusts (REITs). However, they’re less liquid than options and require larger minimums.
Is Real Estate Investment Better Than Stock Investing?
For many reasons, the benefits of real estate investment far outweigh what you’ll gain from investing in stocks. You can generate income and enjoy passive returns depending on your preferred real estate investment option.
Most stocks pay four percent or less as dividends annually. While it isn’t a bad return, you might not make enough when you factor in inflation unless you sell the stock.
However, with real estate investing, you can earn a substantial cash flow when you rent your property and enjoy a large profit upon the property sale.
Are There Risks to Real Estate Investing?
Although many real estate investment advantages exist, they also come with some risks. Some risks associated with real estate investing include fluctuations in the housing market, failure to make monthly mortgage payments that can lead to foreclosure, property loss or damage, maintenance and repair costs, and potential for vacancies.
Hence, doing your due diligence and employing strategies to mitigate these risks is essential. Also, consult with professionals like real estate agents and attorneys before making investment decisions.
What Is the Average ROI for a Rental Property?
The average ROI for a real estate investment varies depending on the property type, area’s rental rates, and location. According to Bankrate, the average return is between 9.5% to 11.8%, depending on the property type.
However, since investment real estate is long-term, returns might fluctuate over time.
If you’ve been asking, “Is it good to invest in real estate“? We have provided all the answers in this article. Real estate is a long-term investment. As the property increases in value, it becomes a tangible asset that increases your net worth while providing stability and security in a fluctuating market.
Besides building long-term wealth, which is a benefit of investing in real estate, investors can enjoy tax breaks and a cash-on-cash return with income properties. Successful investors can build equity over time while maximizing returns by applying the right real estate investing strategies and leveraging financial options.
Whether you’re a first-time home buyer or a seasoned investor, investing in residential or commercial properties is a great way to achieve long-term financial goals while enjoying tax advantages.
If you’re considering adding an income property to your real estate investment portfolio, Homes by Ardor has many knowledgeable real estate agents that can help you find investment properties to suit your needs.
Investing in real estate benefits is enormous, and with the right real estate agent by your side, you’re on your way to becoming a successful investor and enjoying financial freedom.
Kris Reid is the CEO of Ardor SEO, a company that helps real estate professionals get more leads and customers to predictably grow their business.
Over the years, Kris acquired extensive knowledge of SEO and its practical applications in various industries, with the main focus on real estate.
In 2021 Ardor launched the Icons of Real Estate Podcast to share proven strategies from the top producing icon agents with the real estate community.
After obtaining the real estate license in 2022, Kris joined eXp Realty and launched Homes by Ardor, the platform that was built to be the fastest way to buy or sell a house. Homes by Ardor also provides leads for its partner companies and realtors.