Why Invest in Real Estate?

A professional can help you navigate the what, how and when, of investing but, only you can answer the question of why. For this reason, identifying your why is a crucial step in the process. It creates the foundation you need to formulate an effective strategy and invest with purpose. Making investments in real estate can be incredibly rewarding when done correctly—and for the right reasons.

#1: You want to build generational wealth: Real estate is a tangible investment and one of the easiest asset forms to pass down from generation to generation. You could also consider starting an LLC to own and operate real estate investment properties, passing the LLC down to your heirs. Many people also like the fact that they can leave their property in their will for their children and, in some cases, defer some of the taxes.

#2: You want to diversify your portfolio: When stocks are down, real estate values can often go up. So, when you add real estate into your portfolio you can lower its volatility and provide a higher return per unit of risk. The more direct the real estate investment, (e.g. buying a rental property) the better the hedge. Generally, the real estate market is one of low volatility, especially compared to equities and bonds. Real estate historically has outperformed many investments and should continue to do so. 

#3 Leverage: Many new investors do not truly understand the power of leverage. Leverage involves using debt plus a small amount of equity in the form of a down payment to purchase property. Real estate offers one of the best opportunities to do this through the typical mortgage. This means that you can control the whole property and the equity it holds by only investing a fraction of the

total value. With other investment options, such as buying stock, you typically have to pay the full value of the stock when you make the investment.

#4: Tax Advantages, Why not?:
A tax break alone may not be enough of a why to spark your interest in making an investment in real estate. But, it is worth exploring so that you know why these rules exist and how to use them to your advantage. For example, current tax laws allow you to write off common costs like mortgage interest, taxes, insurance, repairs, and more, thus reducing your taxable income. You can also depreciate a home's value over time, ultimately lowering your tax liability. You might even be able to avoid paying taxes when you sell your investment in the property by using an IRS 1031 tax-free exchange, where (subject to rules) proceeds from the sale of one property can be invested tax-free in a similar, new real estate purchase.

These four reasons are just the beginning of why people decide to invest in real estate. There are very few, if any, investments that can provide you with all the benefits that real estate can. It is truly one of the best investment vehicles available.

You should seek the advice and expertise of a financial advisor or real estate agent, especially if you are just starting out. A professional can help you navigate the what, how and when, of investing but, only you can answer the question of why. For this reason, identifying your why is a crucial step in the process. It creates the foundation you need to formulate an effective strategy and invest with purpose.