When done correctly, real estate is one of the most popular, profitable, and stable investment choices that can generate a high profit return. The advantages of investing in real estate include the ability to generate wealth, use equity as leverage, and protect your money from inflation. In addition, there are immeasurable benefits to investing in real estate, like improving your community, providing housing, and building a network. Make sure you’re aware of the pros and cons of real estate investing and choose the right tools to succeed.
Start gathering information about potential real estate investments, searching for properties, or getting knowledge from the learning resources on Roofstock. Roofstock is a real estate listing platform built specifically for investors, so every listing includes extensive financial property data like estimated rent costs, cash flow, and annual rates of return.
Here are the top advantages of investing in real estate:
1. Generate Wealth & Build Equity
The first of many advantages of investing in real estate is the power of equity. When you own a house or piece of property, it naturally appreciates, or increases in value. As you pay the mortgage down and allow the house to appreciate, you build equity. Equity is an asset part of your net worth, making it one of the most straightforward ways to generate wealth. For example, according to FRED, the value of homeowner equity nearly tripled between 2011 and 2022. With equity, you have multiple options to generate cash flow and get a return on your investment (ROI). If you sell the home at the right time, you can get a large profit. On the other hand, you can use equity as leverage to increase your investment portfolio even further. With equity from one property, you can buy a rental property to generate monthly income and double your gains from building equity.
2. Reliable Long-term Investment
Although the real estate market fluctuates, it is a stable investment that continually increases in value. Compared to the stock market, which is a highly volatile investment, real estate is not prone to frequent market swings or inflation. Properties don’t immediately change in price based on capital contributions or political volatility, making real estate a safe and stable long-term investment.
The charts below visually show how the stock market and real estate market fluctuate and grow over time. Notice the peaks and valleys the stock market graph displays. While the real estate graph has fewer ups and downs, it goes steadily over time.
Plus, real estate is a physical asset that can always be monetized. Owning real estate benefits the investor by providing ongoing income and tax benefits while the property increases in value. Renting the property provides a cash-on-cash return, and residing and reselling the property provides an ROI.
Real estate is ideal for experienced investors looking to diversify their portfolios. It provides insulation against higher-risk investments like stocks and mitigates the risks of investing in volatile markets. Real estate is part of a broad category of alternative investments, which include everything—from art to collectibles and physical gold. The tangibility of real estate affords property owners a sense of stability during bear markets or short-term stock sell-offs.
3. Protection From Inflation
While most people fear inflation, real estate investors don’t have to. Properties are rarely impacted by the effects of inflation, which is one of the most valuable benefits of real estate investing in current markets. Instead of being negatively impacted, real estate investments generally rise in value along with inflation. In fact, the graph below shows how home prices have stayed consistent along with inflation over the last three decades.
A graph for Median Home Prices vs Consumer Price Index Adjusted Price (1993 to 2021).
As a real estate investor, increases in your expenses will be relative to the increases in property value and income. If you are a landlord, you can maintain or even increase your cash flow according to inflation by adjusting how much you charge for rent. When it’s time to increase the price of rent for your tenants, make sure you know the laws and regulations, provide the correct amount of notice, and write a professional yet direct letter.
To simplify the process, start by downloading our rent increase letter template and using a property management tool like Buildium. It provides a streamlined, easy-to-use platform to manage every aspect of your investments, including screening tenants, managing maintenance requests, accepting rent payments, and communicating efficiently with residents. When you use Buildium for your rental properties, it’s easy to adjust tenants’ rent prices in just a few clicks. Learn more about how Buildium can help you.
4. Rental Properties Provide Passive Income
When you invest in real estate, you open the door to generating passive income. As mentioned, property values naturally appreciate, even if you don’t make changes to the property. Rental properties generate a regular monthly income for owners regardless of whether the owner spends hours working on the property or lives in a completely different state. The ability to make money without dedicating a certain amount of time to your real estate investment provides freedom for investors.
Of course, properties don’t automatically generate money without an investor putting in an extensive amount of work. It takes time and effort to find and evaluate an investment property, get funding, prepare or maintain the property, market the rental listing, and manage the tenants. However, with the right property management company or tool, every part of the process can be simple and stress-free.
For example, Avail provides tools to calculate rental prices, create and promote rental listings, screen tenants, and automate rent payments. It’s an all-in-one tool that can streamline the process of purchasing, buying, and managing your rental, allowing you to generate income and find freedom in your time. Start using Avail for free today.
5. Benefits the Community & Provides Housing
Most investors focus heavily on the financial indicators of investments, but there are also unquantified benefits of investing in residential real estate. For example, responsible real estate investors can greatly impact the community by improving properties, curb appeal, and providing new housing.
When real estate investors buy and repair a dilapidated property, they do much more than simply remove an eyesore. They also provide a new home for residents who need it and ensure that more community members are housed in safe, healthy, clean, and fair conditions.
In addition, working as a real estate investor requires you to be heavily involved in the local community. Work with lenders, real estate agents, home inspectors, and contractors frequently, employing them for your properties. You’ll also build relationships with community members who may be neighbors, homesellers, or potential tenants. Working with local businesses helps stimulate your local economy and creates a network of professionals you can recommend and refer to others.
If you’d like to be among the investors who fix and flip houses, read our articles Ways to Find Properties to Flip for Profit and Tips How to Make Money Flipping Houses to get started today.
6. Wide Variety of Investment Options
Investing in real estate can mean various things—from buying a single-family property to buying a parcel of land or leasing commercial real estate. The right type of real estate investment will depend on your financial abilities, financial goals, and your lifestyle. As a real estate investor, you are in charge of the types of properties and investments you purchase and how you generate money. This flexibility is one of the advantages of real estate that is especially appealing to many people.
Here are some of the investment property types you can choose to invest in with links to articles that will give you the details of how to buy that type of property:
Regardless of how you start investing in real estate, creating a business plan is important. For example, some investors simply use rental income to save money on top of their existing careers. Others use the rental income to cover expenses so they can travel or expand their portfolio even further. With a detailed real estate investing business plan, you’ll clearly analyze your strengths and weaknesses, define your goals, and establish a plan to reach your goals.
7. Effective Means of Saving for College Funds or Retirement
Real estate investing, when done right, is a stable way to increase wealth over a period of time. This makes it an ideal method of funding specific types of goals, like college funds and retirement. For instance, parents may buy a rental property with a 15-year mortgage and put the rental income into a savings account. The property could be paid off before the child turns 18, then either sold or used for continual cash flow.
Money, invest or save diagram drawn on the blackboard using chalk.
On the other hand, the same process could be used to save for retirement or to supplement retirement funds. Since rental income is remarkably stable, retirees can use the cash flow while continuing to build equity.
8. Relatively Easy to Finance & Create Leverage
Real estate investments are relatively easy to finance, especially when compared to other assets. You can borrow 50% to 90% of the acquisition cost, and the interest rates are often below the anticipated ROI rate. In 2022, the average interest rates are about 4.73%, and mortgage interest rates haven’t gone above 6% for almost 15 years, as you can see in the chart below.
A graph for Historical Mortgage Rates 1971-2022.In comparison, it’s not uncommon to get an ROI of 15% or more on investment properties. However, it’s essential to understand that the rate of ROI for investment properties can vary significantly, and ROI may not be the only calculation or most important method to define your profits. Instead, depending on the type of real estate investment you make, it’s better to focus on the cap rate or cash-on-cash returns. Learn more about calculating cap rates, cash-on-cash returns, and ROI.
Yet another financial advantage of investing in real estate is the ability to use financing to increase the ROI of a property, which is called positive leverage.
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