Compared with every other investment product out there, real estate has no equal. This point is compounded after considering that interest rates are still hovering at all-time lows, and purchasing real estate allows the investor to use the power of leveraging borrowed funds.
Leveraging is one of the chief advantages to investing in real estate. By obtaining a mortgage to acquire a rental property, an investor has the ability to leverage the borrowed funds to not only generate monthly cash flow but to also realize a gain on the underlying value of the property.
As an example, if an individual who spent $10,000 investing in the stock market achieved a 10 percent return on his investment, he might be excited enough about that $1,000 to tell his friends about it. If the same individual had spent his $10,000 investing in a rental property valued at $200,000, and the property had appreciated by 10 percent, his gain would have been $20,000.
Now that is something to get excited about!
This is not even taking into account the fact that the monthly cash flow generated by a real estate investment is typically much more significant than the cash flow that can be achieved by purchasing stocks, bonds or other types of securities. The monthly cash flow on a single investment property might not be life-changing, but seasoned investors can speak from experience about the positive returns associated with owning multiple properties.
There are a number of additional benefits that can be achieved by purchasing a rental property, such as:
- Depreciation – This allows an owner of an investment property to deduct a portion of the property's value off his or her gross annual income. The best part is that depreciation is considered passive income so it is not subject to self-employment taxes.
- Elimination of Principal – Although many of the payments in the first few years are mostly allocated toward interest, which is tax deductible, a small portion goes to the principal. The percentage of the payment that goes to the principal increases over time, and eventually the investor owns the property free and clear.
- Diversification – It’s well known that diversification is a hedge against risk and an essential strategy for success for any investor. Since real estate returns have relatively low correlations with other investment vehicles, such as stocks and bonds, purchasing real estate can be an effective means of diversifying a portfolio.
Of course I would be remiss if I failed to mention one of the main drawbacks associated with investing in real estate: management. Maintenance issues will always arise, tenants will have demands, and accounting functions have the potential to eat up a significant amount of time.
Finding a highly qualified and reliable property manager is the key to success for any investor interested in maximizing his or her time. A property management company such as Sweyer Property Management will provide a range of services, including property advertising, lease preparation, tenant qualification, property maintenance, rent collections, security deposit handling, and income/expense reports.
For information about our rates or to find out how to acquire investment properties, please reach out to our team of experts at 910.256.3031 or via our website.