When you Google “reasons you should be a real estate investor,” there is no shortage of results. I skimmed the first couple of pages, and the ranking sites were predominately high-quality, reliable expert websites.
So why would I write an article about the reasons you should be a real estate investor when there is already so much excellent content out there?
Clarity and the human factor.
The majority of articles assume a certain degree of knowledge about investing in particular and the more complicated points of the financial world in general. I asked a friend of mine who has no experience in finance or investing, to read a couple of the articles and tell me what they thought.
After working through the top three “Reasons why you should be a real estate investor” articles, my friend said he had spent most of his time Googling words and phrases while trying to make sense of what appeared to be entirely senseless.
Then it came to me.
Regular people want to know the reasons they should be a real estate investor. Regular people also have a hard time following information written by financial experts for financial experts. Therefore, what better way to share some of my knowledge and experience than to write reasons why you should become a real estate investor, in plain English.
So, here you go.
14 Reasons You Should Be A Real Estate Investor
As an experienced real estate investor, I must admit to having maybe just a little bias on the subject of “reasons you should be a real estate investor.”
But before I share those reasons with you, and let you make up your own mind about it, I would be remiss if I didn’t also share with you, a disclaimer.
So here it goes.
As with any other investment, real estate can lose money as well as make money. The bottom can fall out of the market (sub-prime crisis anyone?) a global recession can hit when you least expect it, or some entirely random happening which nobody could have possibly foreseen can leave your investment worthless.
Things can go wrong, and if you are in any doubt, contact a financial expert before parting with your cash. You should also be sure to background check anyone who offers to invest in real estate with you, or to “take care of your money.”
Now we’ve got that out of the way let’s get to the good stuff.
You Can Have A Regular Income
The majority of real estate investors put their money into bricks and mortar and then rent out their investment. This applies to both commercial and residential real estate.
Depending on the local rental market, you can set the rent to cover your costs plus an additional amount as income.
The cost you will have may include, but may not be limited to:
- Mortgage payments
- Private mortgage insurance
- Renter liability insurance
- Property insurance
- Property taxes
- Condo or HOA fees
- Utility bills
- Parking stall rental
- And more
You want to be able to charge enough rent to make the investment worth your while, but not so much that you have trouble attracting tenants. Ideally, you want to invest in the kinds of properties which are more likely to attract long-term tenants. This reduces the possibility of finding yourself in a situation where tenants come and go, and you have the costs of finding new tenants, plus the additional burden of paying for your property while it sits empty.
You’ll Have An Income When You Retire
Not only will investing in real estate provide you with a steady income right now, but it ‘s also likely to continue lining your wallet after you have retired.
Other methods of preparing for retirement involve you saving now so you’ll have enough money to live on when you leave work. This means that you are taking money out of your pocket now, in order to live off of it when you’re older.
Not only that but the money you put aside this year is not going to buy anywhere near the same amount in 30 years.
By investing in real estate, you won’t be keeping yourself short of cash now, the income from your rental will grow each year, and this income will still be there well into your retirement.
Real Estate Is A More Stable Investment
There are property flippers that buy an underpriced property in a hot market, hang onto it for a month or two and then sell it “as is” at a profit. This is a risky strategy which can leave you seriously out of pocket if you find you cannot resell quickly, and I am not suggesting you do this.
Instead, I am talking about investing in real estate for the longer-term, in which case your investment is less likely to fluctuate in value than many other types of investment.
We have all seen the financial bit on the news where we’re told how X billions of dollars have been wiped off of the value of shares. Yes, that value will climb again, but you have to wait, unlike with property investments which remain reasonably steady, and when they do fall you usually have a chance to sell before you lose money.
Insulated From Political Impact
I don’t know about you, but I don’t want my money invested in something that can suddenly become almost worthless because of a political spat.
This is how it goes. One president upsets another, imports and exports are affected, and suddenly there is a stockpile of wheat, or steel, or lumbar, or some other commodity, which cannot be sold the other country. If you have your money invested in grain, or steel, or lumber, or some other commodity, you’ll find yourself with lots of worthless product and a big hit to your wallet.
While small local wranglings can affect property prices, by investing in real estate, you are somewhat removed from having the price of your investment dropping for reasons which are way above your pay grade.
There Are Several Tax Benefits
The tax benefits of being a real estate investor have recently changed. From the 2019 tax year, the changes have several either/or elements to them, meaning that you can choose to make claim X but if you do it has an effect on the amount you can claim in Y.
Instead of trying to lay out the entire real estate investment tax guidance, I’ll pick and chose some of the highlights. To make the most of your real estate investment tax benefits, you should work with an accountant.
In the meantime…
- Depreciation. When we buy any item, it gradually loses value over time. This is depreciation, and it is considered a business expense. So, for example
Without depreciation: You earn $10,000 in rental income and pay tax at 25% – You’ll pay $2,500 in tax
With depreciation: Your earn the same $10,000 in rental income, take away $6,000 depreciation expenses, and pay tax at 25% – You’ll pay $1,000 in tax, a saving of $1,500.
- You don’t pay FICA on rental income. If you have a job and earn $50,000 per year, you’ll pay $3,825 in social security and Medicare (FICA) taxes. On any rental income you earn, the tax is a big fat $0.
- Avoid costs and taxes with a 1031. In short, instead of having to pay Capital Gains Tax when you sell one property and buy another, you can sell your property, and you have 180 days in which to roll that money into another property.
There’s No Middle Man
One excellent reason you should become a real estate investor is that you have more control over where your money goes and what happens to it. You also avoid paying a substantial percentage of your profit to other people.
While there are now plenty of online platforms through which you can trade a variety of financial products, the majority of people invest through an advisor. This can be an independent financial advisor, a small partnership, or a massive company.
No matter who you use to manage your money, you will have to pay them to do so. Not only that, but there is always the risk of either intentional or unintentional bias in investment strategies.
You want to be sure your money is invested in such a way that it benefits you, not the investment group as a whole or some other party.
Yes, I know, I said plain English, by I couldn’t think of another way of putting this in the subheader so skip over that and read this explanation. It is in plain English.
Simply put, inflation is the rate at which the cost of goods is rising. So, as inflation increases, the same amount of money in your pocket, or the same amount of money in your investment, buys less. When inflation rises faster than the value of your investment you will find, for example, the dollar value of that investment will buy less today than it would five years ago.
One reason you should be a real estate investor is that, historically, as inflation rises so too does the price of real estate. As a result, the dollar value of your investment in real estate today will still buy roughly what the dollar value of your investment in real estate did five years ago.
So, inflation hedging is a fancy way of saying that by investing in real estate, the dollar value of your investment will, generally speaking, not lose any buying power.
You Can Invest With Less
Traditionally, when you make an investment of any kind, you have to have the money available up front. It doesn’t matter if you are buying stocks and bonds, gold bars, or an amazing abstract painting by a new artist that you hope will go up in value. Sellers like to have payment in their hands, or as close to it as possible before they hand over the goods.
And yes, I know property sellers also want to receive their money before signing the goods over to you, but for real estate investing there is a magic helper. You may have heard of it.
While it will always be preferable to buy a real estate with cash if you can, a mortgage can allow you to make a $400,000 in a property when you only have $20,000 of your own to contribute. Yes, you will have a mortgage to pay off, but in the meantime, you can be earning an income, and the value of your investment is increasing.
So, let’s say, for example, you have $20,000, and you buy a home worth $420,000.
Assuming that house prices rise 6% per year, in 20 years the property is worth $1,346,996.90.
Property costs over 20 years, including mortgage repayments, interest, repairs, etc. can be estimated at $683,807.63, which leaves you with a profit of $658,189.27.
If you were to invest that same $20,000 into stocks, bonds, etc., PLUS add an extra $1,000 per year, at the end of 20 years, you would have $102,305.79
So, even taking into account expenses, mortgage interest, insurance, repair, etc. by taking out a mortgage and investing in real estate, just one property would make you $555,883.48 MORE than you are likely to make anywhere else.
Oh, and I didn’t factor in any income you would receive from that property either.
You Can Raise Capital
When you invest your money in real estate, you have a property against which you can borrow further money.
Not that you want to be drowning yourself in debt, of course.
If you experience a short term issue for which you need an injection of cash, it is easier to borrow against your property than it would be to borrow against stocks and bonds.
Not only that.
If you are in good financial shape, you can borrow against your property to make improvements or upgrades. This, in turn, can increase the property value. With an improved property, you may be able to charge a higher rent, which also means you can pay off the loan and get to making more money, more quickly.
There aren’t too many opportunities to borrow money, improve your investment, make it worth more, and write off the money you spent as an expense.
You Can Invest As A Group
Just as you can invest more and have a higher return by taking out a mortgage, so too can investing in real estate as a group. You can join together with friends, family, or other property investors, there are no rules that say you have to know or be related, or that you can’t be.
There are several ways in which you can form a real estate investment group and, as far as I am concerned, using something called “Tenant in Common” is the best way. Tenant in common is basically a legal ownership model which allows people to own property together.
Whichever way you choose to invest as a group, it can be an excellent way to maximize the amount you have available to invest.
Real Estate Is Less Difficult To Predict
We have all seen the movies and TV programs where socially awkward but brilliant financial analysts spend all day looking for patterns or pieces of information that everyone else has missed. They then take that info, work out that a particular business is about to be awarded a mega contract and become worth billions, invest in that company, and make a considerable profit.
Meanwhile, in real life.
The financial markets are notoriously difficult to predict at a general level, let alone trying to work out what a particular asset will be worth in ten years time. Not only that but you need to have all of the secret squirrel information that is swapped in financial circles yet jealously guarded from the rest of us.
Real estate, however, is much easier.
Information such as whether house prices are going up or down in a particular area is easy to come by. It’s not hard to work out how much rent you may be able to get for a specific property and whether or not it is in an area in which it will be easy to find renters.
In order to monitor a local or regional real estate market, you need to watch:
- Mortgage interest rates
- Employment rates
- The number of property sales and the prices for which homes are selling.
- New construction
- The average cost of rentals in the area.
- Population growth, or shrinkage.
- The average income of local residents.
Together, the information from these areas of the real estate market will give you a feel for how good and how safe an investment any particular piece of property is likely to be.
So, for example:
If you find a large house with lots of bedrooms in a university town, you know it is going to be easy to rent to students. As long as the average rents are more than you would end up paying to own and maintain the property, it is a viable investment. Besides, the university isn’t going anywhere so you can rely on this as a regular income stream.
On the other hand…
If you see a small, two-bedroom house at the end of a dirt track, outside city limits in an area of growing unemployment, you’ll have a minimal pool of possible renters. It won’t matter how affordable the property is it’s going to attract very few renters. So, suitable investment property? No. Not so much.
You Have The Ability To Choose Your Investment
This reason you should be a real estate investor has two elements to it.
First, the bigger picture.
When you invest in financial products, you generally have little control over which companies in which your money is invested. Yes, you may have funds which say they are “green,” “ethical,” “sustainable” or such, but there are few ways in which you can invest your money without giving up control.
Oh, except one.
Investing your money in property allows you to see exactly where your money is going and what it is doing. There’s no chance you will find out in a years time that your nest egg, along with that of many other investors, is residing in the vaults of a company which has been exposed as having unethical practices.
Now the smaller picture.
By investing in real estate, you have full control over your investment. You can choose where and when to invest your cash. Don’t want to have your money in a community where you do not agree with their lifestyle or beliefs, no problem. You can choose not to put your money there and instead buy a property in another community
You Can Spread Your Investment
Investing in real estate allows you to have a fair degree of control over how and where your money is working. Besides, once you are in a position to hold multiple properties, you can buy real estate in a variety of locations. This will further minimize the relatively low risks involved in real estate investment.
Satisfaction Being A Landlord
Yes, the safe investment of your money, excellent growth, and a regular income are all important reasons you should be a real estate investor, but not everything is about money.
Being a good landlord and providing clean, safe, affordable homes to those who need them is an excellent reason in itself for investing your money in property.
The reasons you should invest in real estate are many and varied. As well as being a safer, steadier, and more reliable place to invest your money, property investing can also provide some personal fulfillment.
While there are some reasons you should not be a real estate investor, as long as you are sure you’re doing it with clarity, once you have taken a deep breath and dipped your toe into the wonderful world of real estate investment, you’ll never look back.
Additional Information From Real Estate Experts
How Your Vacation Property Can Pay For Itself – Jeff Nelson
Pros and Cons of We Buy Houses Flipping Companies – Bill Gassett
Financial Benefits Of Buying A Home – David Martin
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.