I never shy at answering, “why invest in real estate” because there are so many lucrative benefits. Whether you are a young adult wanting to get ahead or a retiring worker wishing to maximize your life savings, there are plenty of reasons why it is good to invest in real estate. For example, a few of the benefits being, tax breaks, hedging inflation, and a future income stream. If you are contemplating the decision of invest in real estate or business or “how much should I invest in real estate”, consider both for diversification purposes and weigh the proportions by your situation. Although is no single strategy to building wealth, investing in real estate should be apart of everyone’s portfolio plan.
To answer, “why do people invest in real estate”, one extremely popular reason is for the tax benefits. A person is able to use the depreciation of their real estate to shelter their income from taxes. Since the IRS recognizes a residential real estate asset wears down overtime, they depreciate the asset at a rate of 27.5 years. For example, if you bought a $200,000 building, it would be deprecated by 27.5 years and there would be a tax shelter of $7,272 per year (200,000 x 0.275 = $7,272). This alone can answer why people invest in real estate. Furthermore, the depreciation shelter of real estate becomes extremely important for those individuals who make a higher level of income because they receive heavier tax rates. To see the IRS’s 2018’s tax rates and brackets, click HERE.
If you’re still asking yourself “why should I invest in real estate”, consider the benefit of being able to hedge against inflation. Real estate is considered a great inflation hedge because typically, during times of inflation, home values increase. For example, if there is an increase in the money supply, which causes inflation, and the supply of houses remains the same, the demand will increase, and therefore drive up home prices. This coupled the general appreciation of a real estate asset are two great answers to “why should you invest in real estate”. To understand the broader view of fighting inflation, click HERE, to check out Bigger Pocket’s article “Real Estate as a Hedge Against Inflation”.
Next time someone asks “is it wise to invest in real estate” or “is it smart to invest in real estate” you can assure him or her the real estate industry is a smart move to make. The return on investment is much higher than the yield from Treasury bills and bonds. For example, last year in 2017, the 3-month Treasury bill and 10-year Treasury bond return rate were both under 3%. An average rental return on a real estate investment ranges anywhere from 8-15%, with lows being around 5-6%, which is still at least 2% higher than the bills and bonds (Stern.NYU.EDU). Furthermore, people who flip houses and look for quick cash with higher returns in shorter time frames, usually expect no less than a 10% return. Real estate investments have less volatility, more control, and it’s a physical asset you can see and touch. To learn about the best places to invest in real estate click HERE to read “Best Places to Invest in Real Estate: Producing the Highest ROI!”
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Resources
- https://www.irs.com/articles/2018-federal-tax-rates-personal-exemptions-and-standard-deductions
- https://www.biggerpockets.com/renewsblog/2012/12/29/real-estate-hedge-against-inflation/
- http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
