Conventional wisdom says that the pros outweigh the cons when you direct your time and financial resources toward real estate investments. In a lot of cases, this old adage proves reliable. There are plenty of reasons to invest in real estate, whether you’re building your nest egg, saving funds for a rainy day, or aiming to retire early.
Types of Real Estate Investments
Generally, two distinct categories comprise the majority of investments in the real estate industry: physical properties and investment vehicles. Learn how these compare and which category may be right for your investing strategy.
Physical Real Estate Properties
Many individuals place great value on tangible assets like physical properties. An investment property that someone can visit and potentially rent could take the form of a commercial, residential, or industrial building, as well as a vacant plot of land. The investment opportunities for the latter are abundant, ranging from a parking lot to commercial real estate.
However, it is important to keep in mind depreciation is a possibility for any piece of physical real estate. Shopping malls across the country have seen property values drop. Fortunately, history indicates that the value of most properties may likely increase as time progresses, especially if it is situated in a highly desirable location.
Investment Vehicles
On the spectrum of intangible assets, investment vehicles include real estate stocks, such as a real estate investment trust (REIT), exchange-traded fund (ETF), or mutual fund. With REITs, the average investor could benefit from partial ownership of commercial properties, like a hotel or office building, and collect regular dividend payments.
ETFs and mutual funds share similarities in they are both pooled investments, where multiple investors put their money into a fund that could consist of a combination of stocks, bonds, REITs, and other securities. Interest or dividend payouts from these financial vehicles make it possible to generate passive income through real estate investing.
Over the years, real estate crowdfunding has gained popularity among investors who have pooled their funds to financially back existing or prospective real estate projects. Initiatives financed through crowdfunding encompass a wide variety of properties, from multi-family residences to industrial warehouses.
9 Reasons To Invest in Real Estate
Between appreciating asset values of physical properties and tax benefits related to investment vehicles, there are a lot of advantages to having real estate investments. Tax benefits, potential early retirement, and portfolio diversification are only a few of the reasons why an investor should consider financing real estate.
1. Produce Consistent Cash Flow
Homeowners with a rental property often generate steady cash flow by collecting rent payments every month. Even if the landlord still has mortgage interest they are continuing to pay off, the cash from tenants’ rent could go toward reducing the home loan to zero.
In addition, real estate investors who receive monthly, quarterly, or semi-annual dividends or interest distributions can enjoy the perks of regular cash flow.
2. Benefit From a Passive Income Stream
As an extension of the previous point, the cash flow is part of a passive income stream. Passive income helps real estate investors spend less time on their day jobs or side hustles for extra cash and more on activities that matter to them.
A solid passive income stream could free up time for an individual to go volunteer for meaningful causes. Plus, carve out quality time with loved ones or devote time toward another worthwhile endeavor altogether.
3. Diversify Your Investment Portfolio
Investing in only one or two sectors, such as financial technology and health care, is similar to putting all of your nest eggs in one basket. Portfolio diversification can increase your net worth, depending on the short and long-term investments that you make.
With real estate being diverse itself, investments in this particular industry may strengthen your overall financial standing. Choose from a broad selection of REITs, mutual funds, bonds, and even physical properties like storage facilities or resorts. Diversified assets have lower volatility rather than investing in only one arena, like the stock market or crypto.
4. Build Wealth to Retire Early
Early retirement can become a reality when you make wise investments across different sectors, including real estate. There are many ways to increase your asset value, from establishing a healthy passive income stream to carrying out renovations to improve your home’s value. Useful free tools like online retirement calculators simplify the math so that you know exactly how much you need to save by a certain age to live comfortably after retiring early.
5. Start Investing With Low Minimums
In the past, primarily, only the wealthy could afford to invest in real estate assets. Fortunately, this is no longer true.
A number of companies allow individuals an accessible entry point to start investing, regardless of their income. Some innovative platforms require little as $10 to invest in real estate, such as Compound Banc, which sells property-backed bonds at a fair rate.
6. Fund Life-Changing Projects
In particular regions and metropolitan areas, a shortage of affordable housing is forcing families and individuals to move to lower-cost locales and other places. Thankfully, select companies are working toward building residential properties like apartment complexes and multifamily houses for people to call home. Real estate crowdfunding can streamline the financial backing for such important projects.
7. Enjoy Appreciating Asset Values
Historical data points show that tangible assets like single-family homes and investment vehicles, including REITs and mutual funds, climb over time. While unexpected economic circumstances could impact markets, the effects are often short-term, with growth expected in the long run. The fact the American economy recovered after a series of recessions indicates that the markets do have a tendency to bounce back in the long-term.
8. Take Advantage of Tax Benefits
When investment vehicles like mutual funds and ETFs are in a tax-advantaged retirement account, such as a 401K or Roth IRA, an individual can collect capital gains distributions without a tax obligation.
In addition, homeowners with rental properties may use specific tax deductions based on their rental income and expenses. For example, a landlord can write off mortgage interest, depreciation, and maintenance repairs on their taxes.
9. Empower Others With Knowledge
After conducting thorough research into the real estate industry, you may have learned about
what makes a good investment, and other useful facts concerning stocks and tangible assets.
Perhaps you’re feeling generous and want to share your knowledge with someone else so they could get started with their real estate portfolio to generate passive income. Your wisdom has the potential to change an individual’s life for the better!
What Are the Potential Downsides to Investing in Real Estate Assets?
The particular drawbacks to real estate investments depend on whether you choose to invest in physical real estate or investment vehicles. When it comes to the former, the upfront costs of putting down a substantial down payment and securing a mortgage loan are challenges that could hinder an investor.
Additionally, rental properties, though useful for producing passive cash flow, consist of property management hassles, which include filling vacancies with qualified renters and making maintenance repairs when a roof caves in or the faucet stops working. While these issues are associated with tax advantages, they are still time-consuming and tedious.
On the other hand, investment vehicles like ETFs and mutual funds can rack up capital gains taxes if they are in a brokerage account not designated for retirement purposes. Most individual investors have to pay a tax rate of at least 15 percent for capital gains on their investments, real estate or otherwise. Also affecting many mutual funds and some ETFs is the fact that actively managed funds overseen by professional managers are subject to annual maintenance fees.
How Can I Start Investing in Real Estate Today?
As previously mentioned, embarking on your real estate investment journey can be as simple as downloading an app. Thanks to innovative financial technology companies like Compound Banc, the process of investing across types of real estate has become streamlined. Plus, the financial barriers to entry have changed significantly, with Compound Banc offering real estate bonds to investors as low as $10 each.
Take advantage of the fixed 7 percent annual yield (APY) on every bond purchased, and build up your passive income stream. Using Compound Banc’s industry-leading app, which is available on the App Store and Google Play, you can come that much closer to reaching your financial goals with the power of real estate bonds that compound.
Join Compound Banc today to become part of a community that is passionate about sustainable income.
Sources:
Exchange-Traded Fund (ETF) | Investor.gov
Ten Things to Consider Before You Make Investing Decisions
Crowdfunding & Regulations - Fintech: Financial Technology Research Guide | Library of Congress
Retirement Calculator | Calculator.net
What is diversification? | Investor.gov
Alleviating Supply Constraints in the Housing Market | The White House
U.S. state home price appreciation 2021 | Statista
Chart Book: Tracking the Post-Great Recession Economy | Center on Budget and Policy Priorities
Tips on Rental Real Estate Income, Deductions and Recordkeeping | Internal Revenue Service
