Exploring potential real estate opportunities in 2022? With rising house prices, more and more individuals are considering buying property as a strategic investment. While all investments come with their inherent risks, real estate satisfies a fundamental human need: shelter. As long as there’s a demand for homes, investing in real estate remains a steadfast choice.
Before delving into finding prime real estate or determining returns, ask yourself: Is real estate for me? Let’s dive into why property investment appeals to many, both big and small investors.
Why Buying Property is a Smart Investment
Real estate should be on the top of your list of potential investments. It’s not a quick path to riches, but it offers potential. With patience, you can achieve steady returns and pave your path to financial freedom.
Here are some compelling reasons to invest in property:
#1 Cash Flow Benefits from Buying Property
Cash flow is the biggest attraction of buying property.
Cash flow is the money you have left over after paying all your expenses. Unlike many investments, which bank on long-term capital gains, smart real estate can offer steady income early on.
#2 Tax Savings When Investing in Real Estate Properties
Owning and operating rentals come with tax deductions. These include repair costs, interest, taxes, and insurance. Although expenses can reduce cash flow, the tax code gives real estate investors unique advantages. Consequently, real estate investments provide you with flexibility in tax planning that many other investments do not.
#3 Property Appreciation Boosts Your Investment
Property values tend to rise over time. Despite occasional dips, such as the 2008 crisis, most properties appreciate annually. When selling, your property might have soared in value. Add this to cash flow, and real estate makes a great investment.
Plus, a 1031 like-kind exchange can defer capital gains tax, when buying property again. This provides even greater potential for long-term wealth building.
#4 Leveraging Depreciation When Buying Real Estate
Depreciation is one of the greatest benefits of investing in real estate. Depreciation allows you to take an expense on your taxes without actually expending any cash. This can shelter a significant amount of the profits from your real estate investment from taxation, and it’s not unusual for real estate investors to enjoy all the annual profits from their investments completely tax-free.
Here’s how it works. If you purchase a residential real estate property as an investment, you can deduct the cost of the purchase—excluding the value of the land—over 27.5 years. So, say you paid $250,000 for the home, with the appraisal valuing the land on which it sits at $50,000. This gives you $200,000 to deduct. Consequently, you can deduct around $7,272 per year from your taxes in addition to all the other expenses associated with your rental property. So, if you turn a $10,000 profit on the property per year, less than $3,000 of that profit will be subject to tax.
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#5 Building Long-Term Wealth Through Property Investment
Real estate investments are excellent ways to build long-term wealth. If you are careful to make a good investment, you will find that you can enjoy consistent cash flows year over year with little to no taxes. If that weren’t enough, your tenants pay your mortgage for you, and your property grows in value. It’s easy to see how the combination of all of these factors can result in the accumulation of significant wealth over time.
#6 Using Leverage in Property Purchases
Unlike most other investments, financing is readily available for real estate investments. While purchasing a rental property typically requires a down payment of 20% to 25%, there are ways to buy real estate with little to no money down to get started.
One popular way is to identify the rental property you want and buy it as your personal residence. Low to no down payment programs are available for homebuyers that are not available for real estate investors. So, you can purchase the property as your personal residence, live in it for a year, and then move out to turn it into a rental property. Then repeat.
Another related strategy is to purchase a duplex, triplex, or fourplex and live in one of the units. Residential loans are available for properties with up to four units, meaning you can get the same great loan options on these properties while living in one unit and renting out the rest.
And, if you want to get started really small, you can offer just a bedroom to rent out to help pay your mortgage, whether to a long-term tenant or as an Airbnb.
This is an excellent way for even a very small investor to get started, and it’s not something that you’ll have to do forever to keep going. As your properties grow in value, you can refinance them to pull out cash that you can use to purchase other properties.
The opportunities here are tremendous.
#7 Property Investment Acts as an Inflation Hedge
In a time of historically high inflation in the United States, this is a significant concern. The value of hard assets like real estate tends to increase as the value of the dollar decreases. So, your property will likely hold its value even as your money doesn’t. In addition, as inflation increases, so does rent, allowing you to raise rent rates to keep up with the market.
#8 Diversifying Investments by Buying Properties
They say you shouldn’t put all your eggs in one basket, and real estate can add significant diversity to the typical investment portfolio of stocks and bonds. It also provides a balance against other investments, as real estate values are not dependent on the fluctuations of the stock market.
Overcoming Challenges in Property Investment
Now, investing in real estate isn’t all rainbows and butterflies. There is always risk, and there will be bad years. But if you invest for cash flow, it’s still possible to remain profitable even during the difficult times.
But it requires diligence. To be a successful real estate investor, you’ll need to dedicate a significant amount of time and effort to stay on top of market trends and make wise investment decisions.
You must also consider that real estate, unlike publicly traded securities, is not readily convertible into cash. If something happens and you need to liquidate your investment, it may take time to sell.
In addition, you must ensure that you are adequately insured. Owning real estate comes with the risk of legal liability. If a tenant or guest is hurt on your property, for example, you may be sued. Without proper insurance and asset protection strategies in place—such as holding your property in an LLC—you may find yourself legally exposed.
Finally, if you do not hire a property manager, you may find your time consumed with managing your investment. Everything from bookkeeping to general maintenance tasks can be very labor-intensive.
Nevertheless, good things don’t come easy, so if you’re willing to deal with these challenges, the financial rewards can be extraordinary.
Key Steps to Buying Property Successfully
If you’ve finally decided to invest in real estate, you should decide on an investment strategy. Do you want to invest in single-family homes? Duplexes? Commercial properties?
Real estate is a diverse investment option with a myriad of different opportunities. If you scattershot your investments, particularly in the beginning, you may find yourself unable to become competent enough to achieve success anywhere.
As you get started, also make sure that you monitor your progress and overall growth consistently by keeping a close eye on key metrics, particularly:
- Cash flow
- Net operating income
- Cash on cash return
- Capitalization rate or cap rate (more important for commercial properties than residential)
This will help you realize if a particular strategy is working or whether you should shift tactics to improve your results.
With all the potential benefits and challenges, buying property remains a promising avenue for both new and seasoned investors. You can generate a little extra cash while also diversifying your investment portfolio. Not to mention, it’s a great way to reduce pre-tax income and build long-term wealth.
The real estate industry has a lot of potential for long-term growth, and it’s never too late to enter the market, so long as you put in the effort to acquire the required skills and expertise—or find a trusted advisor who already has them.
If you’re interested in learning more about how Weekender Management can help you get started in real estate, schedule a call with us today!