Investing in real estate has long been a best kept secret of many of America's wealthiest families. As more people discover the benefits of owning property beyond a personal residence, they tap into the growth, tax shelter, and stability that real estate offers. Here are six things that investing in real estate can add to your portfolio.
1) Real, Tangible Value
When you buy a piece of real estate, you are buying a tangible and scarce asset. Buildings can be rebuilt, but the land supply is essentially fixed. Furthermore, even if the market fluctuates up or down, the underlying asset still has utility.
2) Healthy Cash Flows
Even though real estate has historically been a conservative investment, stable properties can easily return anywhere from 5 to 10 percent in net operating income every year, even without the benefit of leverage. Investing in real estate that is more speculative or using leverage can increase returns even more.
3) Tax-Sheltered Growth
When you own real estate and it goes up in value, you don't have to pay taxes on it. From the IRS's perspective, the only time that you have a taxable event is when you sell. You can even pull out equity through a cash-out refinance, tax-free. Thanks to the 1031 tax deferred exchange process, you can even sell investment property to buy more investment property without paying capital gains taxes — try to do that when you sell Apple shares to buy Oracle shares in a taxable account.
4) Tax-Sheltered Income
The IRS taxes real estate income favorably. It lets you write off a broad range of expenses while also allowing you to claim depreciation to further reduce your tax liability. Furthermore, you may even qualify to write off any tax losses that you incur against other types of income.
5) Leveraged Growth
One of the secrets to investing in real estate is using leverage. Financing for anywhere from 55 to 80 percent of the purchase price can be available, letting you use someone else's money to increase your own purchasing and earning power.
6) Stable Leverage
Real estate leverage is also stable. When you have a real estate loan, most lenders won't call it because the value shifts. This protects you from having to sell in a down market. As long as you can afford the payments, you can usually keep your loan until the end of its term.