Real estate is a great investment for a variety of reasons, not only in financial terms, but also in the sense of satisfaction it can bring to you. Here is my take on the five best reasons to consider adding real estate to your investment portfolio.
Reason #1 – There’s Only So Much to Go Around
Real estate is a genuinely fixed commodity, perhaps with the small exception of man-made islands being built off the coast of Dubai. As a result, since the 1970’s, real estate values have outpaced inflation. And while it’s true that bubbles have happened and real estate does sometimes fall dramatically in value, there are other financial reasons that real estate investments make sense.
Reason #2 – Tax Advantages
If you choose to own real estate within an entity such as an LLC, there are a whole host of expenses that can be deducted from any rents you collect. These include:
- Property taxes
- Property insurance.
- Mortgage interest.
- Property management fees.
- Property repairs, capital improvements, or ongoing maintenance.
- Advertising expenses (like the cost to list a rental or market a property for sale).
- Legal and professional fees such as an accountant, attorney, or bookkeeper.
- Business equipment such as a laptop, printer, office desk, or phone.
- Office space, including a home office.
- Communication such as internet, a PO box, or phone line used for business purposes.
- Travel expenses including your vehicle mileage and parking fees.
- Education and memberships such as the annual fee for a trade association or cost for a seminar, book, or course on a topic relating to your industry.
- Meals (as long as the meal is with a prospective or current client or partner and business is discussed).
Another huge advantage of real estate is the ability to generate “paper losses” by depreciating the property over the 27.5 year schedule allowed by the IRS. This tax treatment allows you to generate positive cash flow from rental real estate properties without being taxed on it.
Finally, you can buy investment real estate within your self-directed IRA through a custodian such as Camaplan to defer all gains and taxes on a property out of higher income years to future, lower income years.
Reason #3 – Passive Income
Real estate also allows you to generate passive income in the form of rental income. Once you get your property up and running you can find and hire an excellent property manager, usually for somewhere between 8-12% of the rents you collect. This allows your rental properties to chug away making money in the background while you pursue active income streams that you are more passionate about.
Reason #4 – The Magic of the “Before and After”
However, not all of real estate investing needs to be passive. If you love taking on house projects and seeing the magic of “before and afters” either in your own home or by watching HGTV, you may absolutely love tackling a rehab that truly transforms a property. Plus, this is your opportunity to actually create value within the real estate you own and further increase the profits you can make.
If you’re unsure, start with a lower cost cosmetic rehab and, if you love it, move on to increasingly complex projects.
Reason #5 – Making an Impact
Finally, one of the most compelling reasons to invest in real estate is the opportunity it presents to impact your neighborhood and the residents within it.
Through your efforts, you can transform a property from a community eyesore to a community asset. And, you can genuinely improve the lives of residents by providing much needed safe, well-maintained and affordable housing.
Consider real estate as an investment not only to improve your personal bottom line but also to improve the lives of your tenants and the surrounding area