When creating investment portfolios, the wealthy have always overweighted real estate as a primary asset of their portfolios. Throughout humanity’s history, we have seen the importance of land, whether for agricultural, commercial, or housing purposes. Through the fighting of empires and nations or the private corporate acquisitions of land in more modern days, we know the obvious value of real estate from a physical and natural view. But the thorough list of financial benefits of real estate investing is what has catapulted its recent popularity further. Quite simply, real estate’s expansive list of benefits provides opportunities for investors to implement a proper strategy and begin growing their portfolios. Listed below are the top twelve benefits of real estate investing and why you should find a way to add this highly coveted asset class to your financial plan.
01 | Passive Potential
One key difference between a job and an investment is the time commitment you are willing to put into it. To find a promising investment vehicle, you must find one that you can scale by using other people’s time. When investing in publicly traded companies, the board of directors and company executives run the company to ensure that your investment is in good hands. At a more direct level, stockholders can also transfer portfolio management to a fund manager who allocates their investments according to how they see fit.
Real estate investments require a significant amount of time as each property may exist in its own company. One of the main benefits of real estate investing is the potential for passive returns when investing in a group, syndication, or investment fund. When investing with an asset manager or investment firm, investors can employ a company to run the assets for them so they can spend their time how they see fit. When investing in a group, investor’s real estate portfolio becomes entirely passive.
02 | Significant Cash Flow
Every winning team has one person who everybody relies on as a leader to achieve success and make others better. When it comes to building a successful investment portfolio, cash is your most valuable player. In the game of finance, a portfolio that does not generate future cash flow is worth very little, if anything. When you compare investment opportunities, the options with a faster and higher cash return receive more favorable ratings from investors.
Real estate provides opportunities for extreme levels of cash generation through lease revenues. Investors can take the money to pay back their expenses and have remaining cash left over. Private real estate projects can generate a cash-on-cash return of over 8% exceeding the average stock market dividend of 2-5%.
03 | Inflation Hedge
We understand the damaging effects of inflation. It can be scary watching your portfolio collapse, wondering if you can still hit your investment goals or retire on time, and nobody likes to pay more than they must, especially on necessary items. With the United States currently experiencing the largest inflation in generations, setting up an investment portfolio that can minimize the damage is too crucial to ignore. One of the best ways to hedge against inflation is to directly own income-producing assets, usually real estate, or a business where revenues can increase to match the economic environment. In addition to raising revenue, you can hold down real estate costs. By locking in fixed expenses such as property taxes and a low mortgage rate, your bottom-line margins and cash flow can expand during inflationary periods boosting your portfolio in the long haul.
The yearly average for rent growth has seen appreciation that consistently beats the Federal Reserve’s stated goal of 2% annual inflation. Since 1975, only twice has the growth rate fallen below 2%, although the national rent growth rate was still positive during 2010 and 2011.
04 | Appreciation
In commercial and multifamily real estate, when your bottom lines improve your asset valuation will appreciate. Real estate is a finite asset as there is only so much land available. Once planners designate a purpose for land, that purpose usually sticks for a while time considering changing zoning laws can be a long bureaucratic process. As you zoom in on the map and select a specific location, the available land gets smaller at each interval. Florida real estate is less common than American real estate, and by getting into a specific metropolitan area such as Miami even less available land exists. At the neighborhood level and the individual street level, each piece of real estate shows its unique traits. When you own a piece of land there is no copying that property and its traits. You can mimic it and try to be similar, but it can never be the same. The distinctive traits of a property contribute to property demand which over time creates appreciation as the supply of humans grows and land supply decreases.
This can create periods of explosion for income-producing real estate such as in December of 2021, rent income saw a 14% year-over-year growth rate.
05 | Direct Control
One of the more notable benefits of real estate investing is direct control of asset performance. Contrary to most other assets that are habitually dependent upon external economic factors, real estate allows for more strategic maneuvers placing more power in your hands. As one of the more complex asset classes, investors can implement a variety of different investment strategies that can create a prosperous portfolio during any part of the economic cycle.
When investors require direct control of an asset to achieve their desired returns., it certainly will require more work. Yet real estate assets provide opportunities for passively achieving high returns so you can spend your days as you wish.
06 | Price Stability
Contrary to several other financial assets that trade daily such as stocks or mutual funds, real estate transactions are slow-moving and detailed. Because of this property values are slow to move which is an amazing benefit for the conscious investor. When looking at a stock portfolio the value will be different looking at the beginning of each day and every day. Especially during trying times, this can cause investor anxiety and fear preventing the regular investments that your financial plan requires. With a more stable real estate portfolio you can sleep well knowing your portfolio will not drop significantly overnight and the power is in your hands.
Additionally, tenants can enter long-term leases to protect their revenue stream for extended periods to help with stability. Real estate projects also frequently see growth each year and many expenses are fixed leaving you with a predictably profitable portfolio.
07 | Leverage
One of your investment strategies could provide you with opportunities to leverage your buying power. Using traditional lending institutions, you can leverage your buying power by 400-500%. The financial benefit of using leverage is that typical interest rates on a loan will usually be lower than the percentage of expected net operating income of the property or capitalization rate. This creates the opportunity to use other people’s money to buy a place, give them their desired return through interest, and then pocket the difference. In the world of finance, arbitrage is the process of taking advantage of buying and selling at different prices and is a foundational principle of running a sound business. Specifically, cap rate arbitrage (cap rate spread) is the difference between interest rates from “buying” a loan and a capitalization rate of selling to tenants. Using leverage and cap rate arbitrage effectively creates opportunities to purchase larger cash flows for less money which boosts your portfolio performance.
08 | Amortization
When the word debt comes to mind for most Americans it does not bring feelings of excitement or opportunity but nervousness. However, there are ways of responsibly using debt. Amortization is the process of gradually paying off the initial cost and the coinciding interest over time. Of course, this is the element of real estate that can generate the most risk, but this is also a benefit responsible for generating a substantial chunk of your returns.
When a conventional loan amortizes, your debt service payments remain fixed. However, as time goes on the interest portion decreases, your principal payment increases, and you build more equity with each payment. Meanwhile, throughout the terms of your loans, your tenants cover your debt service through their rent payments. When you sell the building, the cash generated from the sale can pay off the remainder of the loan but the equity you built is yours to keep.
09 | Tax Benefits
Of all the benefits of real estate investing, the tax benefits you can receive are often the most overlooked. Primarily, property expenses such as insurance, maintenance, and property management wages can be written off lowering your tax bill.
Depreciation is another tax benefit that you cannot always use on other financial assets. US tax code allows for depreciation of your asset each year. It is not exceptionally uncommon for a property to generate profit and then use the depreciation to take a financial loss. However, as depreciation is not a cash expense, your cash flow remains strong which can provide you with tax-free income.
One additional tax benefit includes property exchanges. A property exchange is an IRS-sanctioned method for helping real estate investors and developers by trading in a current property for a larger one. By using a 1031 exchange, you can defer all capital gains taxes from a property sale if you buy a new property within the designated period.
Like most IRS codes, real estate taxes can be immensely confusing so be sure to work with a qualified CPA or an investment firm with expertise.
10 | Holding Accounts
Holding accounts is another premier benefit of real estate investing. To improve your tax benefits, self-directed retirement accounts such as a self-directed IRA or a self-directed 401k. Working with an investment company that accepts these accounts as investors can allow you to transition your current portfolio into a real estate portfolio without facing early withdrawal fees or tax penalties. Most individuals assume that they do not have the funds to invest in real estate, but most have retirement investments that they can use if they convert their IRA or 401k into a self-directed account.
Furthermore, legal entities such as an LLC or a corporation allow you to protect your real estate-based assets from your assets legally preventing lawsuits against you as an individual.
11| Diversification
Real estate investing provides an opportunity to diversify your portfolio by using an additional asset class with its distinctive cycle and times of success and setbacks. However, if your portfolio contained only real estate assets, you could still diversify your portfolio enough to see regular success. By using all the diverse types of real estate assets such as residential, multifamily, industrial, retail, and commercial you can experience the extensive benefits of real estate investing while providing four unique market cycles in your portfolio. Additionally, you can diversify based on selecting a unique investment strategy or by location. For example, a Florida retirement development property may outperform a New York retail buy & hold. By owning a portion of each project, you can maximize the benefits of real estate but still diversify your portfolio.
12 | Higher Returns
Overall, when you leverage all the benefits of real estate investing you can maximize the performance with a potential portfolio that outperforms any other asset class significantly. Returns from cash flow, appreciation, and equity provide three streams of predictable returns. So, utilize these benefits, formulate an investment strategy, and start creating the financial future of your dreams.
Real estate investing should be an individualized game. it is vital to align every strategic decision with your financial goals if you are to reach your full financial potential. You can always reach out to us at invest@eikoninvestments.com for investing help.
Happy growth.
