The combination of ongoing uncertainty in the stock market and the real estate market’s steady long-term appreciation has made real property an attractive option for investors looking for opportunities to diversify and grow their portfolios. The following guide provides a look at five potential benefits that may come from adding real estate to your portfolio.
1. Cash Flow
Investing in rental properties can be an effective way to create passive income. Ideally, your rental income may offset some or all of the expenses involved in owning the property and provide a profit.
The term “cash flow” refers to the net income left over after paying a property’s mortgage, taxes, and operating expenses. This amount often rises as your mortgage is paid down, increasing the likelihood that you will see a positive return on your investment when the property is sold.
2. Tax Advantages
Owning real property creates several potential tax advantages. It’s often possible to deduct reasonable costs associated with owning, managing, and operating investment properties. Other common property-related tax deductions include depreciation, interest, and business-related expenses such as necessary travel or a home office.
When it’s time to sell your investment property, you may also be able to defer your capital gains taxes and depreciation recapture by engaging in a 1031 exchange.
3. Inflation Hedge
Unlike many other types of investments, the value of real property tends to move in the same direction as inflation. When inflation starts to rise, typically, so do property values and rents. In addition to providing portfolio diversification, this can also serve as an inflation hedge, helping to protect your buying power.
4. Appreciation
Real estate values generally tend to increase over time as rents increase and produce greater net operating income. Positive rent growth can make real estate a potentially profitable long-term investment.
5. Leverage
Many investment properties are purchased using leverage, allowing you to add an asset to your portfolio without having to pay the entire purchase price upfront. Borrowing capital may increase your investment’s return, and interest expenses can also lower your taxable income. Since the property is used as collateral, financing is typically readily available for qualified buyers.
Explore Your Options
While these are some of the most common advantages of holding real estate in an investment portfolio, there are potentially many more. If you’re thinking about purchasing investment real estate, contact us to schedule a consultation. Our team has extensive experience in building real estate portfolios for clients and we would be pleased to assist you as you explore your options.
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