In today’s market, many people seem to be nervous about getting into real estate. The economy is struggling to pop back out of a recession, rumor has it that loans are more difficult to get, and employment is less certain than it once was. These things are true, yet right now is a great time to invest. Interest rates are at historic lows, and it’s a buyer’s market.
Whether it’s in your own home or an income producing property, there are several benefits to investing in real estate.
- Appreciation in the value of a property. As a general rule, real estate appreciates or increases in value over time. It’s a limited resource affected by supply and demand. There are two types of appreciation. One is under your control, and the other is not. Internal appreciation is under your control. It comes from improvements made to the property such as adding square footage, doing landscaping, or updating the home . External appreciation, however, has little to do with the actual property and more to do with economic forces. When more people are buying, values tend to go up.
- Leverage. This means using other peoples’ money to provide a greater return on your investment than the cost of the borrowed funds. No other investment offers the ability to use such a high loan to value ratio as real estate. The amount of leverage that can be used on a property varies depending on the type of property (ie. principal residence vs investment property), and the quality of the borrower’s credit.
- Tax Advantages: There are tax advantages to both your personal residence (tax deduction for interest paid on the mortgage) and investment property (multiple expense deductions). Talk to your accountant about the tax advantages of real estate ownership.
- Paying Down Your Mortgage: With the ability to borrow, buyers purchase with other peoples’ money. As the loan is paid down, the buyer’s equity, or ownership in the property increases.
- Cash Flow From Rental Income: Similar to a stock that pays dividends, a rental investment will provide a steady stream of income that may very well be greater than any stock dividends. The money comes in, even when you’re not working.
- Interest rates are at an all-time low. The cost of funds makes real estate investing even more attractive.
- “Steal of a Deal”: In a buyers’ market, there is a large supply of homes which puts buyers at an advantage. Buying a property at a great price gives a buyer instant equity, if the price is below market value.
Keeping in mind the saying “buy low and sell high”, it just might be the time to consider making real estate a greater part of your investment portfolio.