Real estate is considered by many to be one of the best investment vehicles due to its potential for long-term appreciation, passive income, tax benefits, diversification, and ability to leverage other people's money.
Real estate is a tremendously lucrative way to invest and has built wealth for people who may have missed opportunities. Real estate is also one of the most common ways in which people become millionaires. In today's post, we're going to walk through the six reasons why real estate is the best investment.
#1 Appreciation 📈
Appreciation occurs when a property increases in value while you own it. While it's not guaranteed, it's common for real estate to increase in value due to numerous factors like supply and demand and inflation. According to the Federal Housing Finance Agency (FHFA), which tracks home prices across the country, the annual appreciation rate for single-family homes in the United States was approximately 5.8% from 1991 to 2020. In some areas, appreciation can be much higher or lower than the average. But generally, you can expect prices to exceed inflation, which gives you a pretty sweet return on your investment.
#2 Tax Write-offs 📝
Real estate has some of the best tax write-offs out of any other investment vehicle. One of the most incredible benefits is something called depreciation. Depreciation is a process that the Internal Revenue Service allows you to do under the tax laws. It involves taking the price you paid for the property and deducting it over a certain period to offset any rental income you receive. So from before, we see that real estate has the tendency to go up in value, and the IRS allows you to depreciate it. What happens after 10, 20, or even 30 years? You'll basically have dodged paying tax on your rental income over time plus made money by simply owning the property. There are many other deductions and tax write-offs available. Depreciation is only one type.
For a deeper dive into real estate tax deductions, check out our article on the Top Landlord Tax Deductions.
#3 Cashflow 💸
Cashflow includes the monthly rents you receive while owning a property. Ideally, you'll rent a piece of real estate out for more than it costs to own it. The difference between the gross monthly income you receive and the associated expenses equals your cash flow. Having a positive cash flow allows you to make money on your real estate and gives you more purchasing power to buy more real estate. Other investments like stocks have the option to pay what's called a dividend. A dividend is nothing more than a payment received, usually quarterly, for owning a stock. Dividends are optional for companies to payout, and they are not as frequent as monthly rents.
#4 It's Passive 🌊⛱️
You don't have to do much when owning a property and having it rented. It's not like having a full-time job where you have to go to work daily from 9-5. Although there is still work to do, real estate tends to be much more passive than a job, unless you're improperly managing it, then it might be a little bit of a headache.
#5 You Control the Asset 🕹️
Real estate, unlike stocks or bonds, allow you to have much more control over what you own. You get to making renovations, work with tenants, and make decisions on when to buy and sell. With stocks and other investments, you don't usually see this control. Typically, there is a specific management team in place that handles all the daily operations.
#6 It's Flexible 💪
Real estate is incredibly flexible. You can rent it, flip it, demolish it, and heck, even move it. There are so many different ways to make money in real estate. It's amazing. This flexibility can sometimes give people decision paralysis, though. If you're looking to get into real estate, try to just pick a strategy and start executing while learning along the way.
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