As many people explore new ways to make good money, investment opportunities seem to always make the list.
Investing is risky business, but the outcome usually exceeds the stress and potential of losing it all.
Although the return on your investment doesn’t happen overnight, it is worth enduring the long-term journey.
Real estate investments give people the potential to increase their revenue, build equity and own property that could turn into multiple investments. Creating wealth they didn’t even know existed.
If you are on the fence whether you should invest in real estate or not, here are the top 10 reasons why you should:
1. Rental Yield
Experienced investors like to calculate the rental yield, which is the percentage yield from direct rental income that can be calculated either as gross or net. The net rental yield approach factors in home expenses, taxes, and other financial obligations into account and divides that amount by the property value.
This could be considered a negative cash flow because it does not factor in monthly mortgage payments. Some investors prefer to include mortgage payments into their rental yield percentage. So instead, they will look at cash-on-cash rental yields.
Investors are able to purchase and manage for a yield on a property that values is worth more than the average stock or bond dividend yields. The return on investment (ROI) with a cash-on-cash yield is one of the best ways to see a grossing return rate.
More so than not, rental properties typically appreciate in value with inflation. Meaning, investors will receive a greater amount than started as the property matures. Just like money in a savings account, the longer the money is kept in the bank, the more it will grow in value.
An increase in the value of a property can indicate two things:
- Ability to reinvest in higher value properties
- Ability to provide an equity line of credit to invest on other properties (follow BCCR for advice on credit scores)
Appreciation is one of the safest and successfully proven ways of getting a good return on investment.
3. Inflation-proof investment
Generally, rental payments increase in a positive correlation with inflation, however, mortgage payments remain consistent and stable throughout the loan’s term.
Once the rent payment experiences a spike, the amount of money coming in will exceed the needed value to manage and turn into a profitable cash flow. If inflation continues to go upward, the cost and ability to financially manage a mortgage will become too difficult for the average person.
Renting offers people comfortable housing with fewer financial responsibilities and obligations when compared to homeowners. If owning a home becomes too expensive, the demand to rent will skyrocket. So, if there are more renters in the market, the supply of rental properties available needs to match.
Using leverage is risky when it comes to an investment, however, the return is greater when done properly.
For example, if you were to use $120,000 in leveraged assets to purchase three rental properties with down payments opposed to purchasing one property with cash, the return rate will significantly increase.
Before you use leveraged assets, beware of the risk and potential consequences that could happen if you don’t invest properly. You will need to do research on what rental properties and areas that can guarantee you a successful return on your real estate investment.
5. Paying off loans
An amortized loan is paying off a debt with a fixed repayment plan that takes a consistent amount over a period of time. Amortized loans are designed to follow a long-term plan of regular installments that directs a certain amount of money to cover the interest and principal.
In other words, paying off loans gives you more financial freedom and access to investment resources to increase leverage costs. Some investors free up funds by increasing equity in one of their properties, so they can invest in others.
Although it will take some time to fully pay off your loans, it will make a huge difference when you start investing.
6. Increase in property equity
Some investors like to take the risk and purchase rental properties at the value price. Mainly because these buildings are missing certain features or could use minor or big improvements.
They have researched and calculated total costs and the value of the property after the renovations have been completed. If the value exceeds the cost of the repair, the amount of equity in the property will increase.
Investors see this as a risky investment, but if the property was researched beforehand and the improvements done were guaranteed an increase in value, the ROI will outweigh the risk.
7. Tax write-offs against other income
As a real estate investor or ambitious risk-taker, your ability to write-off taxes from your rental property can be used against your other income.
There a high chance your rental property will not give you a tax-free cash flow, however, the overage of tax deductions you can use against your other income can save you money.
Experts suggest talking with a tax advisor to see if this investment opportunity’s outcome is favorable to you.
8. Possible tax deductions
The rental real estate is a business that investors are able to potentially convert personal expenses into valid business deductions.
For example, if you owned several properties in different areas, your travel expenses to check on the properties could be deductible, which can increase the tax benefits when it comes to the overall amount of money coming in and the future sale of the property.
Before investing, see if personal expenses like traveling can be classified and deducted as a business inquiry.
9. Tax-free cash flow
Smart real estate investors rarely pay taxes on their cash flow that is generated from their rental properties.
How is this?
Well, the depreciation and mortgage interest deductions should make your cash flow tax free, if you leverage your capital.
This way, investors won’t have to tax their cash flow and the future sale of the property will be much greater once the capital gains increases.
10. Retirement plan
Investing in a rental property is a huge investment and commitment. This purchase demonstrates investors are fully educated and ready to commit their time to manage and oversee the property.
The ROI owning a rental property can benefit you immensely in the long run when you have a consistent cash flow and built up equity. This steady income will become handy in the future when transitioning into retirement.