Real estate has become a popular investment vehicle over the last 50 years. It can be a great way to diversify your portfolio, keep pace with inflation, and grow your wealth. Real estate investing often involves purchasing, managing, renting, owning, or selling for a profit. When investing in real estate, the goal is often to invest and look for the asset to appreciate into the future. However, like any investment, there are risks; you should be properly compensated for the risks you may have to take. In addition to achieving your desired level of profit or expected return on any real estate investment, it's important to keep in mind the costs of owning the real estate and any tax implications now or in the future.
Depending on which type of strategy, real estate investing can require substantial capital. However, it can also be highly profitable and provide many benefits with the correct guidance. For example, some real estate strategies may provide cashflow, long-term capital appreciation, income, tax benefits, etc.
With that being said, it is vital to understand that not all real estate is created equal. After mapping out your initial strategy and setting your goals, you will need to determine which type of real estate best suits your goals, needs, and circumstances. Before investing in any kind of real estate, you need to be knowledgeable with the different types of strategies and constraints before investing. Three of the most common ways to invest include commercial real estate, residential real estate, and single-family rentals. We have provided a brief overview and a list of advantages for each type of strategy that you may find beneficial.
• The benefits of investing in real estate include passive income, inflation protection, tax advantages, and diversification.
• Real estate investors can earn a return though rental income and price appreciation often generated by different types of properties.
• Real estate investment trusts (REITs) offer a way to invest in public real estate without having to own, operate, or finance properties.
Commercial Real Estate
Commercial real estate is often intended to generate a profit, either from capital gains or rental income. The opportunities include:
• Substantial current income:
Commercial Real Estate Investments are generally secured by leases which provide a regular income stream and can be significantly higher than typical stock dividend yields.
• Appreciation of Asset Value:
Commercial real estate investments have historically provided above average appreciation in value over other investments. Properties generally go up in value from numerous internal or external factors. Some of these include making cost-effective improvements to the property or capitalizing on supply and demand imbalance.
• Tax Benefits:
The US Tax code benefits real estate owners in a number of different ways. Loan interest and depreciation benefits can offset a large portion of your income stream.
• Loan Interest is Tax Deductible
• Depreciation is a Tax Benefit
Residential Real Estate
When first investing in real estate, many will often consider residential properties. A property is distinguishable as a residential property if it is used as a place of residence for one or more individuals. Residential real estate typically cannot be used for commercial or industrial purposes. The opportunities include:
• Passive Loss Limitation:
When you are in a high-income tax bracket, these losses can carry forward. Ultimately, it will reduce your taxable rental income in subsequent years which will then reduce your gain or increase your loss when it comes time to sell the property.
• Decreasing Tenant Turnover:
Finding good tenants is important when investing in residential real estate. In particular, focusing on long term tenants is preferred but not required for success.
• Larger Buyer and Renter Pool:
Residential real estate benefits from having a large pool of potential tenants and buyers. The high demand for residential real estate makes this a particularly attractive opportunity for investors, typically no matter the market condition.
• Tax Deductions:
If you carry mortgages on your investment properties, the interest you pay can be used as an itemized deduction on your tax return. Any interest paid from either the original mortgage or the refinance will be able to be written off. This will reduce your tax liability.
Single Family Rentals
Single-family rentals (SFRs) are single-family homes that are rented out to tenants. The opportunities include:
• Higher Market Appreciation Potential:
Single-family homes benefit from higher long-term market appreciation than other housing types. Appreciation is one of the biggest benefits of real estate investing and vital to wealth creation from real estate holdings.
• Monthly Cost Savings:
The monthly cost of owning and renting out a single-family home can be less; there are no monthly condo fees. HOA (homeowner’s association) fees tend to be less common and lower on single-family homes.
• Ease of Management:
It is easier to manage one property rather than managing multiple smaller units.
• Easier to Gain Financing:
It is usually easier to receive financing on a single-family rental.
•Longer Leases Decrease Risk and Cost:
Tenant turnover costs time and money. Cleaning, repainting, interviewing, and placing new tenants can be expensive and result in several months of no rent collection. Families seeking single-family rentals want to sign extended leases. This reduces the cost and cash-flow disruptions caused by vacancies.
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