Did you know that 90% of the world’s millionaires created their wealth through real estate? Billionaire Andrew Carnegie pointed it out over a century ago, and it’s still true today.
In this article, we’ll go over what makes real estate such a lucrative investment. Here are the top five benefits it has to offer:
- Passive income
As a homeowner, you can rent out your property as a long-term or short-term rental. Both can create a steady stream of income that can help you build wealth over time.
In fact, if you hire a property manager to take care of the day-to-day tasks like tenant screening, maintenance and repairs, and emergency calls, your rental can become a truly passive source of income. You won’t have to do anything!
When your monthly rental income exceeds your monthly property expenses, you’ve achieved what’s called positive cash flow. You can save this money or invest it in more real estate.
Over time, your passive rental income can grow much further than a salary ever could. Why? Because rental income isn’t connected to time, and there’s only so much time in the day that you can work for a wage.
- Tax benefits
Another benefit of investing in real estate that many don’t know about is the tax benefits. The government decided a long time ago that it wanted to reward those who invest in property, so the tax code has a lot of tax breaks built into it for real estate investors.
Here are just a few of the tax benefits:
- Deduct property expenses, including property management, property taxes, homeowner insurance, repairs, and more.
- Deduct property depreciation, which to the IRS means the property’s full value spread over a 27.5-year time period.
- Defer capital gains taxes through 1031 exchanges. All it takes is using the property sale proceeds to buy another similar property of equal or more value. You can do this multiple times in a row, even indefinitely.
- Stay exempt from self-employment tax since the IRS doesn’t consider rental income to be “earned” income.
That’s just the tip of the iceberg. Real estate investors enjoy many other tax breaks, for which there isn’t enough space to mention in this article.
- Appreciation
Though real estate can lose value in the short term, it tends to appreciate over time. So if you choose to buy and hold, you can make a significant profit when you eventually decide to sell.
According to the S&P 500 Index, the average annual return on investment for real estate in the United States is 10.6% for residential properties and 9.5% for commercial properties.
- Leverage
One of the beauties of real estate investing is that it allows you to leverage other people’s money pretty easily.
Most homebuyers get a mortgage. That means they put down about 20% of the property’s price as a down payment. The mortgage lender covers the rest. But you still own the property, which means you get to benefit from its full value in terms of appreciation and rental income.
No other asset is quite like this. Consider if you went to a bank to ask for a loan, with which to invest in the stock market. The bank clerk would probably give you a funny look before denying your request.
With real estate, you can build equity in your property over time and get started with fewer upfront costs.
- Tangible asset
Lastly, real estate is a tangible asset that you can touch and feel. It has utility value. That means even if the economy were to crash and your investment property lost all its monetary value, you could still live on it and get real use out of it, unlike other investments like stocks and bonds.
The bottom line
At the end of the day, investing in real estate is a means to an end. When done successfully, it can help you become financially independent and retire early (aka FIRE). It can dramatically change your life for the better and give you more time to spend on things you actually care about like your relationships with family and friends.
Not sure where to start? Consider house hacking your primary residence by renting out a spare room, garage, or accessory dwelling unit (ADU). Once you’ve accumulated enough rental income for a down payment, you can buy your first investment property.
From there, you can gradually grow your property portfolio until you’ve amassed a real estate empire. Start today!
