If you’re looking to diversify your investment portfolio this year, then there may be no better place to look than real estate. While other assets like stocks and bonds may be tempting, real estate has been and continues to be a solid investment choice. But why exactly is buying land or buying already-built houses and apartments a good idea? Here, you’ll find four distinct reasons that real estate is a solid investment choice this year.
1. Tangible asset value stability
If you buy a company’s stock, there’s always a chance that the company could go bankrupt in the next week. While you don’t lose your money right away if that happens, your investment will effectively decrease to zero as the company fades from existence. But with land or property, there’s intrinsic value built into that asset. Owning land in a city or country that people want to live in holds its own value without needing the existence of a company or product.
Furthermore, your property’s value may fluctuate over time to some extent but it certainly will not depreciate as other tangible assets do. For example, a newly purchased car’s value decreases by more than 10% in the first month after driving it off the lot. In contrast, a house’s value will likely increase by 0.25% in that same amount of time. Of course, these estimates are variable due to market trends – but generally, these hold true. Very few tangible assets predictably increase in value over time, but real estate is one of those rare few.
2. Surprising tax benefits
In the United States, the government encourages the purchase of property. They do this through tax breaks and benefits, provided you can navigate the complex rules surrounding these. The easiest tax benefit to claim after purchasing a house is the deduction based on mortgage interest. Simply put, all of the accrued interest you have on a mortgage in a given year can be stated as a deduction on that year’s taxes. Other deductions and breaks can be claimed on a variety of real estate-related expenses, including operating costs, property taxes, and more.
3. Potential revenue generation
If you decide to invest in already-built properties that you don’t plan to live in, you should consider renting those properties out. By effectively becoming a landlord, you’ll be able to generate consistent revenue during the year through rent payments. Of course, going this route isn’t an easy option – there are many costs associated with being a landlord like legal fees and home insurance, so make sure you understand what you’re getting into before you start the process.
Fortunately, rental property management companies exist and are becoming more popular. These companies will take over the menial tasks associated with owning rental property, like cleaning up after tenants and routine building maintenance, and in return take a portion of the profits. Rental management is an option to consider if you don’t want to sink large amounts of time and effort into your rental properties while still gaining some revenue.
4. Fixed payment
If you’re currently renting an apartment, townhouse, or condo, then you know the stress associated with your lease expiring. That expiration usually comes with the delivery of next year’s rent price – which usually increases dramatically, as landlords will assume that your cost of living will increase as you have more job stability. But that increase can add up over time – in some neighborhoods of urban centers, rent can be over $4,000 a month and will increase each year you rent that place.
One way to counteract the increasing rent prices is through the purchase of real estate. While up-front costs can be high (i.e., a down payment and brokerage fees), you’re effectively negotiating a fixed payment plan for the next decades of living. Rather than starting at $4,000 a month in rent and expecting that rent to increase every year, you can pay $3,000 a month in mortgage payments for the next 30 years. If you do the math on that payment scheme, you’ll quickly realize that paying a mortgage will save you money in the long run.
Deciding to purchase property is not an easy choice. Down payments can be quite large and finding the perfect home can be daunting. But if you approach real estate investment as an asset management strategy, you’ll realize that it provides a fantastic opportunity that other assets can’t match. With the four reasons listed here, you’ll be able to pinpoint exactly why real estate could be a good investment choice this year.