When deciding on the best method for your money to grow, your first thought is probably investing in a few stocks or opening a savings account for retirement.
These are viable options to watch your money expand, and you can consider adding real estate to your portfolio. Once you find the right property, you can watch your investment grow through monthly rent payments and increasing equity. Here are some reasons why you should put some of your funds in real estate:
You can diversify your portfolio
If there is one key to any investing strategy, it is that you shouldn't put all your eggs in one basket. Although cliché, the importance of diversifying is noted by all investment experts. This suggestion is a means to reduce your overall risk. If, for instance, you buy shares of an up-and-coming tech startup that eventually tanks, you're going to lose money on that investment. However, you can still have revenue coming in from a duplex that you rent.
Furthermore, you can diversify within your real estate portfolio. With a single-family rental home, all your funds are tied to one property and the assumption that you'll find renters who pay on time. If you add a few more homes or an apartment complex, you can further mitigate your risks.
There are tax benefits
You can have tax-free growth for your cash flow if you're leveraging your capital, which means that the funds you use to purchase the properties are from a lender. This is because of mortgage interest payment deductions and depreciation.
There are also a number of deductions for personal expenses that are related to the management of your rental property, as it is a business. Travel costs and fees paid to friends or family members who manage the home are among those deductible expenses.
Appreciation can be forced
Although real estate isn't as prone to the day-to-day volatility of investing in the stock market, there is always a chance that the value of your property can decline. This is dependent on the market, but you can pad your rental home against changes. Adding value can be as easy as updating the property. If you purchase the home and it has outdated appliances and a kitchen and bathrooms in need of improvements, the money you put into the project can be recovered through the higher rent you can charge for newer amenities. Plus, the renovations add equity.
Real estate requires management
If you're not ready to become a landlord, you can always contract the responsibilities of property management to a third-party vendor or other person you trust. However, this does not mean that you can purchase a home and ignore it. Unlike a retirement savings account where you can forget to put away money some months, you have to keep an eye on your real estate investment. Even if this only means checking on the property once every few months, you get to see how it's performing. This is an advantage over stock market investing, as you have a physical structure rather than an intangible asset to monitor.
With that said, take some time to research and work with tax and real estate professionals to ensure that your investing plan will provide the additional stream of revenue that you want. Not every home is suitable to be rented, and some can turn into a money pit rather than a cash cow if there are too many necessary repairs to be made before you can start looking for tenants. Order a home inspection for any property that you buy to find out if there are any underlying issues that can hurt your investment.