The many important benefits of investing in real estate make it a superior strategy regardless of the investor’s experience and initial capital.
Monthly income, long term gains, and tax deductions are well-known advantages associated with property investments. But there are many more pros that are frequently forgotten. Nevertheless, real estate comes with some drawbacks too, and savvy investors need to evaluate both sides of the equation before moving forward.
Table of Contents
- What Is Real Estate Investing?
- 14 Benefits of Investing in Real Estate
- 7 Top Real Estate Investment Strategies for Maximum Advantages
- How the Benefits of Real Estate Compare to Other Investment Types
- Some Risks of Real Estate Investing
- How to Maximize the Benefits of Investing in Real Estate
In this article, we’ll talk about what investing in real estate entails and its benefits to investors. We’ll also compare this strategy and its advantages to other popular investment types and explain why real estate is superior to stocks, bonds, and gold. Finally, we’ll show you how to optimize your investment decisions for maximum return.
What Is Real Estate Investing?
Investing in real estate is the best way to make money in both the short and long term without risking too much. Generally speaking, this investment strategy refers to obtaining a real estate property and earning returns from it. You can hold the property for a couple of weeks (with house flipping) or decades (with rental properties).
Arguably, the biggest advantage of investing in real estate is the multitude of options you have available. You can go for many different markets, property types, and strategies. Your choice depends on your background, experience, education, time availability, financial resources, and personal preferences.
We’ll discuss the top real estate strategies in a bit.
14 Benefits of Investing in Real Estate
Let’s get right to the core of all this: What advantages does real estate investing bring?
Here are the 14 most significant ones:
1. Steady Rental Income and Cash Flow
This is a no-brainer. The #1 benefit of investing in real estate is the steady flow of cash you earn in the form of rental income. After all, the main reason people choose to invest in anything is to make money to supplement the income from their 9-to-5 job or replace it altogether.
Depending on the location, you could earn significant income to cover your expenses and make money on the side. Mashvisor’s nationwide real estate market analysis reveals that at the end of May 2023, short term and long term rentals bring an average monthly income of $2,548 and $2,261, respectively. This translates into an annual income of $30,576 and $27,132, in that order.
It is the average for all rental properties across the US. If you choose the location and the property wisely, you can secure a significantly higher steady flow of income for a long time and even save for retirement. For example, hot tourist destinations reap higher income for vacation rentals, while big economies and college towns generate substantial revenue from long term rentals.
And you do not have to stop investing in one property at a time. You can pick up the pace and invest in multiple rental properties all at once to increase your positive cash flow and diversify your real estate investment portfolio.
Related: Find High-Income Properties for Maximum Returns
2. Real Estate Appreciation
Another importance of real estate investments comes from the fact that you get to make money not only in the short run but also in the long haul. It is achieved through real estate appreciation which works on both residential and commercial properties. What this means is that over time the value of real estate assets increases remarkably, despite temporary slowdowns.
The average annual real estate appreciation rate in the US market since 1991 is 4.4%. Nonetheless, there are sizable regional differences, with some markets seeing double-digit or even triple-digit growth and others undergoing declines. That’s why when investing in real estate, it’s important to choose a market with a robust long term appreciation potential.
The main reasons for the guaranteed increase in home values over time are population growth and land–where properties are built–being a limited resource.
3. Reasonable ROI
Next, we have to highlight the fact that (smartly executed) real estate investments generate excellent returns. According to up-to-date Mashvisor national data, short and long term rentals bring an average cap rate of 3.63% and 3.53%, respectively. Once again, this refers to all active rental listings in the US, while individual properties frequently generate double-digit returns.
To boost your profitability with real estate, it’s a must to select both the location and the property carefully. In terms of a market, this requires an area with affordable property prices and strong demand from renters. With regards to the property, you have to choose a home that has the potential to stay occupied most of the time and generate above-average rental income.
4. Long Term Financial Stability and Wealth
The main advantages of investing in real estate include providing investors with long term financial security. When you have a steady flow of cash for years on end, this leads to accumulating wealth as long as you save your additional income or – even better – reinvest it in more properties.
Indeed, real estate has been one of the most popular ways of building generational wealth in the US market. As we mentioned before, home values continue to increase decade over decade, and this appreciation exceeds a single generation.
Related: Invest in Long-Term Rental Properties: A Secure Investment Option
5. Tax Benefits
Real estate investing comes with significant tax advantages and deductions because of being considered a business. The tax breaks and benefits are a significant reason why many choose this strategy over other investment types.
The IRS offers tax breaks on a wide range of expenses associated with running a rental business, like property depreciation, property taxes, insurance, maintenance, and legal and other professional fees. Property maintenance and repairs also qualify, as well as travel expenses. In addition, rental income is not subject to self-employment taxes.
Another tax break real estate investors get is the 1031 exchange, when they can deter the payment of capital gains taxes for extra benefit.
So, with properties, you not only get to make money but also keep a good portion of your money instead of paying it in the form of taxes.
6. Fund Leverage
When you buy an investment property, in most cases, you obtain an asset that’s worth more than your own initial capital. Indeed, you use someone else’s money–in the form of the best loans for investment property–to invest. It is something you cannot do with stocks, bonds, or other investment strategies.
Leveraging other people’s money to generate income and build wealth is a unique benefit of investing in real estate properties.
7. Secured Mortgage Payments
Using someone else’s financial resources to build your own investment portfolio doesn’t stop with the mortgage or other types of loans. When you start repaying the loan in the form of monthly mortgage payments, you don’t use your own money either. Instead, you use the money of your tenants or Airbnb guests that you receive as rental income.
So, as long as you can find a suitable property in a good location, you don’t have to worry about providing the money for the loan repayment. Your renters will do this for you.
Related: 6 Best Companies Offering STR Loans
8. Equity Accumulation
Real estate benefits don’t end here. Another important one to add to our list is the ability to build equity in the properties you invest in over time. This happens as you pay off a bigger and bigger part of the loan, so more and more of the property becomes yours.
As your equity in each investment property increases, your wealth increases, and you get enough money to continue buying new rental properties for sale.
9. Hedge Against Inflation
Yet another factor to consider is that real estate assets act like a hedge against inflation. In other words, investing in properties protects you and your finances from the adverse effects of inflation. This happens in two different ways.
First, historically the average annual rate of real estate appreciation has exceeded the average yearly inflation rate in the US housing market. So, the value of your investment asset increases faster than the rise in price levels. Second, as inflation goes up, so do rental rates, so your rental income keeps up. It’s a win-win situation for real estate investors.
10. Passive Strategy
A common misconception preventing many from enjoying the advantages of real estate investment is that this has to be an active, time-consuming strategy. This is as far from the truth as possible.
As long as you use the right real estate analysis tools, you can find profitable opportunities for investing in a matter of minutes. Afterward, if you hire a good professional property manager, you can enjoy passive income month after month.
11. Low-Risk Investment
Because of being a physical asset, real estate is a very low-risk investment type. With stocks or bonds, you can lose everything overnight if the market crashes or your chosen companies drop. Plenty of stock investors have lost all their wealth in a matter of days.
This cannot happen with real estate properties. The worst-case scenario is that your property might get destroyed by weather or civil disobedience. But as long as you’ve insured it well, you can recover your losses. And such extreme calamities rarely occur. Usually, investors can benefit from ongoing rental income and long term appreciation year after year.
12. Portfolio Growth and Diversification
Investing in real estate makes it very easy to grow and expand. As long as you end up with positive cash flow from your first property, you can save up enough cash for a down payment on a second one in a matter of years. The more properties you have in your portfolio, the faster you can add new ones.
Meanwhile, you can diversify your assets to spread risk. You can buy different types of properties (residential vs commercial) and various kinds of houses (single-family homes, condos, multi-family homes, etc.). You can invest in new markets, and you can try out both the short term and long term rental strategy. The sky’s the limit with real estate investing.
13. Low Barriers to Entry
Unlike popular belief, it doesn’t take much to get started with real estate investing. You don’t need any special education or qualifications. You don’t need a real estate license in order to buy an investment property.
Furthermore, as we’ve already mentioned, you don’t need a ton of cash to begin. With a conventional mortgage, you’d need about 20% of the sales price to qualify. The current median sales price of houses in the US market, this translates to about $68,000. But if you opt for a hard money loan or a private money lender, you can start with even less.
14. Control Over Your Own Investment
One of the most important benefits of real estate investing is the ability to control your investments and assets. When you invest in stocks, how well you do depends on many factors beyond your reach. But with real estate, you decide where, how much, and how to invest. You choose how to manage your investment.
You can be your own boss and work as hard as you want to maximize returns.
7 Top Real Estate Investment Strategies for Maximum Advantages
While investing in real estate offers many benefits, they don’t just come to you. You have to put the necessary efforts into getting them. The first step is to choose the right strategy.
Following are the seven approaches that make it the easiest to benefit from the advantages of real estate investing, each with its own pros and cons:
Short Term and Long Term Rental Properties
Rental properties are by far the best way to invest in real estate. What you need to do is to find a good market, locate a top-performing property, purchase it, prepare it for tenants, and rent it out. In the long term, you have to maintain your property and manage your renters.
With short and long term rentals, you start making money right away through monthly rental income. And you also build wealth in the long term through appreciation.
The main risk is vacancy, but this can be avoided if you conduct the necessary long term rental or Airbnb data analysis before buying.
Buy and Hold
That’s another real estate strategy that entails buying an investment property and holding on to it to sell in a few years or decades when its value has significantly appreciated. You make money from the difference between the sales and purchase prices.
On the positive side, this can be a very passive investment as you don’t have to do anything other than maintain your property.
On the flip side, you don’t make any profit until you sell your property. To avoid this, you could rent it out.
House Hacking
House hacking is a profitable real estate investment business for beginners who don’t have their own homes yet. With this strategy, you buy a small multifamily real estate property, like a duplex or a triplex, and live in one unit while renting out the rest.
The main benefit is that you can use loans applicable to homebuyers rather than investors, which often provide better terms. Moreover, you solve both your homeownership and investment dilemmas with a single purchase.
In terms of cons, you have to share a property with your renters, which might go less than smoothly at times.
House Flipping
Flipping real estate properties refers to buying a distressed house, renovating it, and selling it to a homebuyer or another investor for a profit. This is a short term real estate strategy.
The great thing about flipping houses is that you get to make a lot of money fast, potentially in a few weeks.
But this is a very active strategy that requires involvement, dedication, and an extensive network of real estate professionals.
Real Estate Wholesaling
Wholesaling houses is a strategy in which you find a property for sale, put it under contract, market it to buyers, and eventually transfer the contract to a final buyer. You don’t even get to own a property but still make money from it.
Similar to fix and flip, the main benefit here is the quick turnaround, which means you can generate a profit fast.
In terms of disadvantages, this is an active strategy that cannot succeed unless you can locate ready buyers fast enough.
Real Estate Crowdfunding
Crowdfunding real estate assets has recently emerged. It means that investors get together online in order to combine their capital to purchase, own, and manage large real estate properties, like commercial buildings.
The positives are that you can gain access to commercial real estate, which might be otherwise unattainable, and you can invest passively.
The minus is that you usually invest a relatively small amount of money, so your returns are also small.
REITs
Real Estate Investment Trusts (REITs) are a more traditional form of crowdfunding not done online. These are usually large corporations that purchase and manage big properties on behalf of individual investors. From an investor’s point of view, investing in a REIT resembles investing in the stock market as you purchase shares of investment properties.
The good thing is that this is done entirely passively, and you don’t need to deal with owning a property.
The bad thing is that you have no control over your investment. Moreover, most REITs require a minimum investment of close to $20,000 and only work with accredited investors.
How the Benefits of Real Estate Compare to Other Investment Types
The fact that real estate investing brings a lot of potential benefits doesn’t mean that other investment strategies are not beneficial. On the contrary, each investment has its own advantages. Otherwise, it would not exist. But property investments also have their own risks, and the question becomes whether the pros outweigh the cons or vice versa.
Let’s see how real estate compares to other popular investment strategies in terms of benefits:
Real Estate vs Stock Market
The stock market is one of the oldest and most widely used investment strategies. It means you buy small parts of one or more companies through shares or stocks. You get to make money through dividends (in the short term) and appreciation (in the long run).
Compared to real estate, stocks are a much more passive investment, which looks like a good thing but can also be bad. In the stock market, you have absolutely no control over how your investment will do. You can make significant profits, but you can also lose every single dollar if the market crashes or your company loses its value.
Stock investments are much more volatile than real estate investments. They are also much riskier.
Real Estate vs Mutual Funds
Another alternative to real estate investing is investing in mutual funds. In this case, multiple investors pull their money together to purchase different assets like stocks, bonds, gold, or even art. Your profit is measured as your share of the total assets and returns.
The main advantage of this strategy is the ability to invest passively and diversify quickly. However, similar to stocks, you have no control over how things go. You could win a steady profit year over year, or you can lose everything overnight.
Real Estate vs Bonds
Many investors choose bonds as their preferred strategy. Buying bonds refers to giving a loan to a company which the company returns over time.
It is the favorite approach for investors who are averse to risk and prefer slow, steady profit. While bonds are relatively low risk, there is no chance of winning big with them.
Real Estate vs CDs
Certificates of deposit (CDs) are yet another investment option that works similarly to savings accounts. The main difference is that they offer a concrete, fixed interest rate. You hold CDs until they mature, after which you can get back your original investment plus the interest.
The main advantage of this strategy is that it is very stable and basically guaranteed. But the disadvantage is that there is no appreciation. You know exactly how much money you will get at the end, and it might not even be able to make up for inflation.
Real Estate vs Gold and Precious Stones
Gold, diamonds, and other precious stones are always considered a source of wealth and investment.
Similar to real estate, gold, and stones end up appreciating in the long term because they are a limited asset. It’s not easy and cheap to make more of them. So, they serve well as an inflation hedge. However, you cannot use leverage to buy more gold or diamonds. You can only grow at the pace that your own financial resources allow.
Real Estate vs Cryptocurrency
Last but not least, we have to mention cryptocurrency investments when we consider alternatives to investing in real estate and the associated benefits. It is a very new strategy that is particularly good for tech-savvy investors.
As the recent emergence of Bitcoin showed, with cryptocurrency, you can make a lot of profit over time. You can become a millionaire overnight. But you can lose your millions equally fast. There is no regulation and no guarantee in the crypto market. Moreover, liquidity is still a problem as there isn’t much you can do with your crypto money.
All in all, considering the advantages and disadvantages of each investment strategy, the benefits of real estate seem to be the best.
Some Risks of Real Estate Investing
While the benefits of real estate investing are many and important, we cannot say that there are no risks associated with this strategy. As a smart investor, you need to understand and consider the potential drawbacks of owning real estate assets to prepare yourself and optimize your approach.
Here are the eight most considerable risks of real estate investments to keep in mind:
1. Initial Capital Requirement
If you want to invest in rental properties for sale, you need some capital for the down payment. There are ways to minimize the required initial capital, but it’s virtually impossible to get started with zero money down. Moreover, you’d need some extra startup capital to fix up your property, pay taxes, furnish it (if renting out on a short term basis), and market it before generating rental income.
2. Financing Needed
In the vast majority of cases, real estate investors have to resort to some sort of external financing. It can be a conventional mortgage or something less traditional like private money, hard money, or syndication. You’d need to do a lot of research to locate the best option with the best terms. Also, each loan comes with some level of risk.
3. Foreclosure Risk
One of the worst possible scenarios for a property investor is to end up in foreclosure. It is directly related to borrowing money to buy an investment property. If you fail to make the monthly payments one too many times, you can lose your entire property and your equity in it.
4. Operating Expenses
Spending money on an income property does not end with the purchase. You have to continue paying for expenses for your rental property business to continue operating. It includes property taxes, rental property insurance, property maintenance, property management, utilities (if running an Airbnb business), etc. Expenses add up fast and affect your cash flow and ROI.
5. Housing Market Fluctuations
Even if overall real estate market trends are always upward, there are temporary ups and downs in every market. Things might take a turn for the worse for a while, which might lead to extended vacancies with no rental revenue. The impact of the recent pandemic on even the best short term rental markets is a good illustration of this. As an investor, you need to be prepared to weather a possible storm.
6. Lack of Liquidity
Investing in real estate assets limits your liquidity options. It’s hard to just sell a property–at a good price–when you need cash. This is a particular challenge in a buyer’s market where you might need to make a loss if you suddenly need money. So, while it’s great to reinvest your rental income in new properties, it’s important to also keep some cash reserves.
7. Real Estate and Rental Legislation
When you invest in real estate, you have to take note of the local rental laws and regulations. This is especially important when you buy vacation rentals, which meet a lot of major restrictions in many top US markets. But some traditional rental markets also favor tenants over landlords, so you have to be familiar with the local legislation before purchasing an income property.
8. Time and Knowledge
The final risk to consider with real estate investing is that it does require some time and understanding of the market in order to be profitable. You don’t need to be a DIY landlord or Airbnb host, and you don’t need a certain degree. But you need to know what you are doing when investing to make money. The good news is that there are plenty of free online resources like blogs and podcasts to learn the basics.
How to Maximize the Benefits of Investing in Real Estate
When juxtaposing the benefits and risks of real estate investments, it’s easy to see that the former significantly exceeds the latter. Moreover, there are certain steps that investors can take to further minimize the risks and maximize the benefits.
If you’re planning to invest in long term or short term rental properties, here are three things to do to boost your positive results:
Choose the Best Markets
The importance of investing in real estate lies in finding the right location. The slogan Location Location Location means that the place where you invest is the main determinant of your profitability. It dictates prices, appreciation, rental demand, supply, rental rates, occupancy, and ROI. Thus, the first step in your property investment journey is identifying the best market for your strategy and budget.
To achieve this, you need to conduct both national and local rental market research and analysis. You need to look into a lot of sources. You have to gather and analyze a lot of data. By the time you’re done with your location selection, trends might have changed.
The Mashvisor Market Finder tool can help you choose the top location for your investment goals in a matter of minutes. You need to enter your preferred strategy, budget, and expected return in order to get a ranking of the top cities or neighborhoods for your needs as an investor.
To really enjoy the benefits of investing in real estate, you need Mashvisor’s Market Finder. The tool lets you see which neighborhoods are worth investing in. It has a Market Overview that lets you see what each market has to offer.
Find the Top-Performing Properties
Another must in rental property investing is locating listings for sale that would turn into excellent investment opportunities. Once again, this requires a ton of manual data collection and analysis in order to get meaningful results. You need to have access to a good source of investment properties for sale in specific homes for sale.
If you’re a beginner investor who doesn’t have the necessary network yet, you can check out the Mashvisor Property Finder. This smart tool helps you find both short and long term rentals for sale that fit your exact requirements. You can use filters such as market, property type, and property size to identify the most profitable opportunities.
Confirm Positive Cash Flow and Strong ROI Before Buying
Yet another thing you can do to optimize the benefits of real estate investments in your particular case is to make sure that your selected property will bring positive cash flow from day one. A major mistake is to invest in a negative cash flow property, hoping you can turn it around. While this can happen, it’s a much safer bet to buy a property that already promises positive results.
It requires performing rental property analysis. This means estimating the rental income based on prevailing rental and occupancy rates, on the one hand, and operating rental expenses, on the other hand. Then you see whether cash flow and the return on investment will be positive. This, in turn, requires finding rental comps and analyzing their performance, which is rather time-consuming.
Alternatively, you can use the Mashvisor rental property calculator to do all the necessary calculations and analysis. You can see the expected performance of any US residential property when rented out on a short and long term basis. You can compare the two strategies and choose the optimal one.
Airbnb Rental Calculator
Bedrooms
Bathrooms
Bedrooms
Bathrooms
To find the best opportunities for investing in real estate properties in the US market, sign up for a 7-day free trial of Mashvisor now.
Reaping the Real Estate Investment Benefits in 2023
There is no doubt that the benefits of investing in real estate are numerous. But there are also some risks that investors need to be aware of. Overall though, the balance between advantages and disadvantages makes real estate a superior investment strategy compared to stocks, bonds, mutual funds, CDs, and others.
The key to success is to proceed with the required degree of caution and to do a lot of analysis before taking any steps. You need to base all your real estate investment decisions on concrete data and analytics rather than anecdotes and success stories. For this purpose, you need access to the best analysis tools like Mashvisor.
With the Mashvisor real estate investment platform, you can find and analyze both markets and properties for sale to guarantee positive results.
To learn more about how Mashvisor can help you maximize the many benefits of real estate investing, schedule a demo with our team.