Benefits of a Real Estate Investment
Cash Flow – Cash flow is one of the most distinguishable benefits of investing in real estate. Simply put, cash flow is the rental income remaining after expenses and mortgage are paid. To generate cash flow from stocks, one usually has to sell them or gain initial returns through occasional dividens, whereas with real estate the gain of cash flow can also come from renting a property.
o Cash flow benefits the investor in the following ways:
- Control over how the cash is used. With stocks and funds, investors that choose to reinvest dividends to increase returns do not get access to the cash, nor have control on how the cash is used
- Influence over variables affecting cash flow. Investors can increase cash flow through initial down payment, maximizing rent, minimizing expenses, taxes and insurance costs, securing favorable financing, and other factors.
- Consistent and Secure Income. The collection of rental income takes place consistently, and you can predict the yearly cash flow with a high degree of certainty.
Appreciation – Appreciation is the increase of an investment’s value. Historically, real estate values have consistently increased over time. That is why Lenders loan on real estate and not on any other investment. Since home prices can fluctuate, the conservative approach to investing views appreciation as an additional bonus to cash flow, but not the primary investment goal.
Leverage – Leverage provides a greater return on the initial investment. The more leverage used, the greater the return, because the returns depend upon the value of the entire investment, not just the initial cash investment. The investor is getting a return on value borrowed as well as value invested.
Taxes & Deductions – A major benefit of investing in real estate is the ability to deduct expenses when renting a property, such as maintenance, taxes and interest.
1031 Tax Exchanges – The primary benefit of the 1031 exchange is the deferring of capital gains taxes paid on the sale of an investment property. This is a complicated process and requires a qualified intermediary, and can only defer the taxable amount of the first property sold.
Depreciation – This is another tax benefit of real estate investing, and is how you recover the cost of income producing property. This is done by deducting some of the cost of the improved value of the building, not the land, each year on your tax return.