Sunday, 20 September 2015

Advantages of Real Estate Investment

Real estate is usually held as part of a larger portfolio, and is generally considered an alternative investment class. Real estate fits well as part of a portfolio because it has several qualities that can enhance the return of a larger portfolio, or reduce portfolio risk at the same level of return.

1. Cash Flow
Advantage of real estate investing is the rent derived from rental property. It can result in ongoing, additional income. Positive cash flow is derived from the revenue collected in the form of rent. The cash generated by a real estate investment will always be a much larger percentage cash-on-cash return than any other investment. Over the time, additional income may enable you to take a dream vacation, buy a long-awaited speed boat or grow your retirement fund.

2. Leverage
Leverage is the ultimate power of investing, and the fact is that there is no investment where the application of this tool is more powerful than real estate. In real estate, the leverage is based on the asset itself, and even the notoriously conservative banks will loan up to 75-80 percent and sometimes higher of the total asset value. Banks are comfortable lending large sums of money for the purchase of real estate because they know it is one of the safest and most profitable investments available. Also when you leverage an investment, you reap the benefits of appreciation on the total asset value, while only having a small percentage of your own money in the deal.

3. Appreciation
Real estate generally is a long term investment, and its benefits are best realized over the long term. It takes time for real estate to appreciate in value; however, while the property is being appreciated the residents are paying down the mortgage. On top of this, the rental income grows on a percentage annual basis.

4. Hedge against Inflation
Many people feel that the commonsense thing to do is to take your money and put it into a savings bond or bank account that yields 2 to 3 percent per year. The main argument for this type of investing is that it is “safer” than real estate or other types of investments. The problem with this strategy is that you do not actually make any money, due to inflation.

Inflation is the price we pay for goods measured against a standard of ability to purchase those goods. Consider a case where the inflation rate is 3.5 and you have invested your money into some investment option that yields only 2 to 3 percent, this earns you no purchasing power in the future. You are actually losing wealth because inflation is higher than your returns. The gain in form of interest is wiped out by the rising cost of living. You are not becoming wealthier; you are becoming poorer because the cost of goods is growing faster than the value of your money.

The beauty of real estate is that it is a tangible asset. Meaning it will generally rise either at the rate of inflation or much higher. Historically real estate has risen at 5 percent per year -a full 2 to 3 percent higher than inflation. And that is just appreciation. That does not take into account the cash flow generated, nor the tax advantages such as depreciation, refinance, and tax deductible mortgage interest.

5. Depreciation
Depreciation is an income tax deduction that allows a taxpayer to recover the cost of wear and tear, deterioration or obsolescence on an annual basis. For real estate, it is non-operational expenses that can be used as an advantage during the tax time.


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