(This advanced blog summarizes real estate investing tips and insights Lofty AI has acquired from working with thousands of investors and institutional funds.)
What are the advantages of real estate investing?
The advantages of real estate investing are truly endless.
This post teaches you the 6 main benefits of real estate investing.
Let's dive in.
1. Cash flow
When you hear real estate investors use the phrase “mailbox money”, they’re referring to cash flow.
Cash flow is income generated when your rental returns exceed your monthly expenses.
When you're generating cash flow, you're generating passive income.
When you're generating passive income, you can sit back, relax, and collect your profits every month.
It doesn't get much better than that.
Appreciation is often overlooked by investors, taking a back-seat to cash flow.
That's because it's really easy to build a discounted cash flow model, but it's extremely difficult to predict appreciation.
Appreciation is simply the increase in a property's value over time.
Real estate values tend to increase over time, which allows you to turn a profit once you eventually sell your property.
If you're able to predict which areas will see the most future appreciation, or gentrification, you can easily double your money in 2-3 years.
Take areas like Williamsburg in NY, The Arts District in LA, and Columbia Heights in Washington D.C.
Had you invested in these areas before they began to appreciate, you would have made 2X your money in just a few short years.
3. Tax advantages
Another advantage of real estate investing is the tax breaks and deductions.
The government offers tax breaks for the following:
- Property depreciation
- Maintenance repairs
- Travel expenses
- Legal fees
- Property taxes
You're also entitled to lower tax rates for your longer term investments.
There's also something called a 1031 exchange. 1031 exchanges let your defer your capital gains taxes once you sell one property and exchange it for a similar property.
The more formal definition is below:
The term 1031 Exchange is defined under section 1031 of the IRS Code. (1) To put it simply, this strategy allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, as long another “like-kind property” is purchased with the profit gained by the sale of the first property.
4. Portfolio diversification
Another benefit of investing in real estate is the ability to diversify your assets.
Many people hesitate to get involved with real estate investing because investing in stocks takes just a few clicks.
Investing in the stock market is fine, but you never want to have all of your eggs in one basket.
A huge advantage of real estate is the low correlation it has with other major asset classes.
This means the addition of investment properties to you portfolio can lower your volatility and provide a higher return per unit of risk.
Ever wonder how regular Joe's with 9-5 jobs are able to buy a couple $100k+ properties per year?
It's because they're using leverage.
With leverage, you can buy a $100,000 property by only putting $20,000 down. The rest, you can borrow from a bank (mortgage) or borrow it from a hard money lender.
So, instead of buying one property for $100,000 upfront, you're able to buy 5 properties for $20,000 down on each.
6. Inflation hedge
The final advantage of real estate investing is that it's hedged against inflation.
With increases in inflation, your rental income and property value actually increase substantially. This is because as the cost of living goes up, so does their cash flow.
The inflation hedging capability of real estate comes from the positive relationship between GDP growth and the demand for real estate.
Real estate investing may sound scary when you're just starting out, but there's really not much to it.
If done correctly, you can build generational wealth for your family for years to come.
You also get to be your own boss. It doesn't get much better than that.
Remember, before you dive into real estate investing, or any form of investment for that matter, you always want to consider the risk.
You always want to guarantee you're only investing enough money to where, if you lost everything, your life wouldn't be drastically affected.
If you're just starting out and you want access to cash flowing, A.I. vetted properties primed for appreciation, you can request access to Lofty AI by clicking the button below.