Both institutional investors and everyday people possess the desire to have their money make more money. Simply put, there is always a desire to have a passive income. One of the most common forms creating a passive income is achieved through investing. Often times, investing comes in the form of stocks, mutual funds, and ETFs. In general, these promise a solid return of anywhere from 5 to 7%. However, as investors place large sums of money into these investments and the ever-looming risk of a stock market remains, the need to diversify arises. One of the best ways to do so by investing in real estate.
Real estate investing offers several key advantages which have drawn investors young and old for many years. First off, the cash flow from real estate investments are straightforward. For instance, when someone purchases a building or apartment complex, the cash flow is the difference between the rental income and the mortgage payment. Thus, the cash flow is monthly and consistent. Beyond the assured income, there is an opportunity to create “instant equity”. If a property is below market value when it is purchased, a high appraisal after purchases creates what is known as “instant equity” for the investor.
To ensure a large quantity of “instant equity” and that the monthly cash flow is high, it is important to choose the right market to which to invest. When looking at properties, investors need to look at the community’s potential growth and see where other investors are getting into the market. With some of these higher growth markets, investors have the opportunity for their properties’ value to appreciate.
Furthermore, real estate investing offers principal pay-down and tax write-offs. The steady flow of rental income goes straight to paying down the loan principal, which gives the investor a high value at a very low rate. By utilizing tax write-offs, investors have a chance to reap large profits. The 1031 Exchange, which is highly underused in the current market, is a purchasing option that allows an investor to essentially swamp different investment properties and avoid paying taxes on the income of the sale from the previous property. Like any second business or other sources of income, there are write-offs corresponding to travel costs, maintenance, mortgage interest, and more.
Finally, real estate investment offers inflation-profiting. Traditionally, the term inflation has a very negative connotation. However, for a real estate investor, inflation widens the opportunity for return, because as the market value increases over time, investors can continue to bump the rent to keep their returns the same. So, while rent goes up, the value of the loan does not go up, because loans are not inflation-adjusted values. While other returns on investment do not account for inflation, real estate investments do.
With the advantages of real estate investing in mind, there are two types of real estate investing: traditional or turnkey property investments. Traditional investments are buying an apartment, condo, or a piece of land. On the other hand, turnkey investments are buying into properties which they do not have to directly manage. Turnkey investments allow investors to avoid the headaches of maintenance and tenants, while still benefiting from the returns. In total, both provide the financial benefits of real estate investing and, as a whole, offer a whole new area of creativity and opportunity for investors.
