Investing in property can be a great way to build your net worth, diversify your investment portfolio, generate cash flow, or build your retirement fund.
However, you have to know the basics before you start investing in properties. They'll help you determine whether property investment is right for you.
Many people want to invest in real estate. Few put forth the time or effort to learn what they need to invest successfully. Do you think investing in real estate might be the right investment vehicle for you? Here are a few property investment basics to help get you started.
Why invest in properties?
Real estate is a worthwhile long-term investment because it offers attractive benefits, including cash flow, appreciation, diversification, tax deductions, and competitive returns. It’s the combination of these advantages that creates such an appealing investment vehicle.
There are dozens of ways to invest in real estate, but for the most part, investors partake in this asset class for these five reasons.
1. Cash flow
Cash flow is the income from renting or leasing a property. Positive cash flow means there's money left over after paying expenses. Negative cash flow means there are more expenses than income.
Most investors buy property because it offers positive cash flow. Cash flow can be acquired from a single-family rental property, apartment complex, industrial building, retail space, self-storage facility, and many more real estate investment vehicles.
Let’s say you buy a duplex that produces $2,000 a month in monthly rental income. After $700 in expenses and paying the mortgage, you have a positive cash flow of $300. That might not seem like much, but once you pay off the mortgage, it'll go up. And if you buy another property, your total cash flow will go up again.
Eventually, with enough time and positive-cash-flow properties, you can create a monthly income that sustains your living expenses. It could even replace the income from your job or support you in retirement.
When building long-term wealth, cash flow is almost always a factor.
If you hold a property over some time, there's a chance the property will increase in value, or "appreciate."
Appreciation is a potential added benefit of real estate investing -- there's no guarantee it will happen. Market fluctuations or shifts in local economics can disrupt the local supply and demand. That changes the value of a property.
However, the longer you hold a property, the higher the chance it will appreciate over that time.
Managing risk is a large part of investing. You can manage risks by selecting certain investments over others or making multiple investments. Many people use real estate to diversify their investments beyond stocks, bonds, and mutual funds.
There's still risk in real estate investing. But having properties across multiple asset classes, markets, or investment vehicles can lower your risk.
4. Tax benefits
While most new investors don’t get into real estate because of the tax advantages, they can be a significant benefit.
There are several tax incentives and deductions offered to real estate investors. There are also ways to use real estate to defer taxes or avoid having to pay taxes on future gains at all.
Learn the tax benefits available when investing in properties. And if you have questions, speak with an accountant who specializes in real estate investing. They'll help you figure out how to get the most tax benefits from your investment.
5. Return on investment
It doesn’t matter if you invest in stocks, bonds, cryptocurrencies, or real estate -- the goal is to grow your money. This is called a return. The higher the return, the faster you get your money back and start making a profit.
For example, if you put $25,000 in a real estate investment receiving an 8% return, you would get $2,000 in yearly income. Over 20 years, that initial $25,000 would garner you $40,000 without requiring additional money.
It's worth noting that you may have to put in more money for things like maintenance and tenant screening. But those expenses are deductible.
There's no guarantee your money will grow in real estate -- or any investment vehicle, for that matter. But you can get a consistent return with real estate. Buying a rental property today could mean cash flow for decades to come. Appreciation, tax benefits, and a strong long-term return sweeten the deal.