Real estate has long been considered a good investment because of its potential for appreciation and its ability to generate a steady stream of passive income. For decades, people from all around the world have benefited from this valuable asset class by using it to build wealth and achieve financial security. But for those who are unfamiliar with real estate investing, it can be intimidating to start.
Unlike other investments, real estate is a physical asset that you can see, feel and visit. Whether you have one commercial space or multiple properties, it's something that you can check in on and assess whenever you need. Depending on how much you want to be involved, it can also mean working with various people and companies (e.g., real estate agents, property management company and other real estate investors) to make sure everything goes smoothly.
If you ask any real estate investors, they'll tell you that the risks can be well worth the rewards. In this article, we will look at several of the key factors that make real estate a good investment.1
Seven Benefits of Real Estate Investing
1. The Potential for Appreciation
One of the most attractive features of real estate as an investment is that it tends to appreciate (or increase) in value. This is particularly true for properties in desirable areas, such as those that are close to good schools, amenities and transportation. As the population in these areas grows, the demand for housing increases, which in turn drives up the properties’ value.
Real estate can appreciate over time due to a variety of factors, including inflation, market demand and improvements made to the property. In many cases, this appreciation can be significant, as the value of real estate has historically increased at a rate faster than inflation.2
2. The Ability to Generate Passive Income
Another main benefit of real estate investing is the ability to generate passive income through rental properties. As the owner of a rental property, you’ll collect rental payments from tenants. This provides a steady stream of monthly income that can be used to cover expenses (such as a monthly mortgage payment) and help achieve financial goals. Additionally, when rental rates increase, so does your income as the landowner.3
3. Diversification of Investment Portfolio
Investing in real estate can be a good way to diversify your investment portfolio and spread out your risk. This is especially important in times of economic uncertainty, as real estate has traditionally been less volatile than the stock market. This lack of correlation with traditional investments helps to balance out the overall risk and returns of an investment portfolio.4
You can also diversify within your real estate portfolio to spread out the risk even further. If the housing market is doing poorly, for example, you can rely on your commercial properties to maintain the cash flow and alleviate the burden.
When purchasing an investment property, it’s typically possible to use leverage, or borrowed money, to increase your potential return on investment. For example, you may be able to make a small down-payment and finance the remainder of the purchase through a mortgage, allowing you to control a larger asset for a smaller initial investment. In this way, leverage can magnify returns and provide more opportunities for growth and income.5
5. Tax Advantages
Owning real estate can also provide tax benefits. For example, you may be eligible to claim deductions for mortgage interest, property taxes, depreciation and certain expenses related to maintaining the property. These benefits can help reduce your taxable income and liability and provide greater cash flow to purchase additional investment properties.6
Having control over a property allows you, as an investor, to customize and improve it to increase its value and rental income. This can be particularly beneficial if you have strong personal maintenance and repair skills, which can help you to increase the property value—through renovating, remodeling, and adding new features—at comparatively low cost.7
Real estate can also provide a sense of security, as it’s a tangible asset that you can physically occupy or rent out to others. In comparison, investments such as stocks or bonds are not physical assets and may be more vulnerable to market fluctuations. Although the real estate market is certainly not immune to its own ebbs and flows, you'll never run the risk that your investment may become completely obsolete.
For many people, the knowledge that they have a secure place to live provides them with an overall feeling of safety and confidence.8
Residential and Commercial Real Estate
When considering real estate investing, it’s important to understand the differences between residential and commercial real estate. Each is distinct in terms of the type of zoning laws involved, properties, tenants and the level of maintenance required. While both can generate cash flow and income through rent, commercial properties typically have more potential for higher returns and stable income, while also carrying a higher level of risk.
Commercial real estate refers to properties that are used for business purposes, such as office buildings, retail spaces, warehouses and industrial properties. They’re typically larger and more expensive than residential properties and generate income through rent paid by tenants. Commercial property also tends to involve longer-term leases and less tenant turnover.
Residential real estate is concerned with properties used for housing, such as single-family homes, townhouses and apartments. These properties are typically smaller and less expensive than commercial properties; they generate income through rent paid by tenants or through appreciation in value.9
Many commercial and residential real estate investors become more closely aligned with their local communities, taking pride in the positive impact they can have on individual neighborhoods.10
Challenges and Risks to Consider
Evaluate risks and rewards carefully and consult with professionals before making any large investment. Your personal financial situation, the current political environment and your geographical location are all important elements to consider. Further, there are the many other challenges that come with purchasing real estate, including maintenance costs, vacancy risk and the potential for natural disasters or other events that could damage the property. In times of a market downturn, real estate can also lose liquidity: It may be difficult to sell investment properties quickly if you need cash in a hurry.11
These challenges notwithstanding, real estate is a tangible asset that can provide a sense of ownership, along with the benefits of customization and personal satisfaction.
Real Estate Investment Trusts or Groups
If you're nervous to venture into real estate investments on your own, there are options for you to join many investors in a collaborative effort.
Real Estate Investment Trust (or REITs) are companies that own or finance income-producing real estate across a range of property values and sectors. REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries—through the purchase of individual company stock or through a mutual fund or exchange traded fund (ETF). The stockholders of a REIT earn a share of the income produced without actually having to go out and buy, manage or finance investment property.12
A Real Estate Investment Group, on the other hand, is a group of private investors who invest primarily in real estate by pooling money, knowledge, and/or time to acquire properties that generate income. The investment strategy used by the REIG will vary by group. They may use any number of typical real estate investing strategies like fixing and flipping, rehabbing and renting, buying commercial real estate, or holding or creating mortgage notes for a property.13
Become a Smart, Savvy Real Estate Investor
Created and taught in the real estate hub of New York City, Yeshiva University’s online Master of Science in Real Estate (MSRE) program is an advanced course designed for entrepreneurial leaders and venture capitalists who want to dive deeper into real estate investing, development and planning. Complete the entirely online degree from the comfort of your own home over 12 or 24 months, depending on your schedule and availability.
Speak to one of our Admission Advisors today and accelerate your entry into the lucrative world of real estate.
- Retrieved on January 12, 2023, from investopedia.com/articles/mortgages-real-estate/11/key-reasons-invest-real-estate.asp
- Retrieved on January 12, 2023, from entrepreneur.com/money-finance/how-does-inflation-affect-real-estate-heres-what-you-need/433953
- Retrieved on January 12, 2023, from s-ehrlich.com/how-to-be-a-successful-landlord-a-guide-to-earning-money-from-rental-properties/
- Retrieved on January 12, 2023, from realvantage.co/insights/diversification-through-real-estate/
- Retrieved on January 12, 2023, from baymgmtgroup.com/blog/what-is-real-estate-leverage/
- Retrieved on January 12, 2023, from investopedia.com/articles/pf/06/rentalowner.asp
- Retrieved on January 12, 2023, from coloradostructuralrepair.com/blog/how-regular-maintenance-can-increase-your-property-value
- Retrieved on January 12, 2023, from urbaneer.com/blog/maslows_hierarchy_of_needs_and_toronto_real_estate_for_buyers
- Retrieved on January 12, 2023, from fortunebuilders.com/commercial-vs-residential-real-estate/
- Retrieved on January 12, 2023, from equityandhelp.com/how-does-investing-with-equity-help-improve-communities/
- Retrieved on January 12, 2023, from cre.org/external-affairs/2022-23-top-ten-issues-affecting-real-estate/
- Retrieved on January 26, 2023, from https://www.reit.com/what-reit
- Retrieved on January 26, 2023, from https://www.fool.com/investing/stock-market/market-sectors/real-estate-investing/basics/real-estate-investment-group/