Investment property involves buying real estate property so as to earn profit. This can be done through renting it out, reselling it in the future for a higher price after appreciation or improvement, or both. The purchase of investment property continues to be a popular choice of investment in the world. However, many people still find it hard to decide whether investing their hard-earned money in property is the right choice for them. Here are reasons why buying an investment property is the best way to make money and build wealth.
Investing in property is easy to understand
Unlike other investments such as those in the share markets that are quite complicated and have complex terminologies, buying an investment property is relatively simple. Apart from the initial amount of paperwork that is needed, real estate investing is quite simple. There are less complex steps and terminologies involved.
Provided that you have your finances right and have done your property research, inspection and valuation diligently, there is little risk for you to make a dud investment. Property investment strategies are also quite straightforward. One of the complicated aspects of becoming a real estate investor is probably when it comes to mortgages since it is essential to comprehend how each type of loan works. However, with the help of a good broker, this should not be a problem.
Equity build-up
Equity build-up is a major advantage of investment property, particularly mortgaged rental property. Unlike for homeowners who pay their own mortgage, for a landlord, the mortgage is paid down by the tenants through collection of rent, while their investment continues to grow in value. As the principal amount of the loan reduces, your equity in the property increases. Over time, the tenant pays for the investment property on behalf of the investor.
This can be accelerated if the investor makes extra contributions to the principal every month along with the regular payment. In cases where the mortgage payment is less than the rental income, the real estate investor doesn’t need to put any additional funds to amortize the loan. The surplus funds could be used to cover any property costs incurred. Essentially, by paying off your mortgage with your rental income, you are purchasing the property gradually.
Related: What Is Equity in Real Estate?
Tax shelter benefits
Buying an investment property allows you to deduct a number of expenses. Tax-related to investment property expenses can be claimed back at the close of the financial year. This helps in the reducing tax bill as well as improving the cash flow. An experienced accountant can legally help you cut down on your tax expenses a great deal, even by thousands of dollars. Some of the tax-deductible expenses include funds used in repairs, mortgage interests, tax preparation, insurance, and property management.
Related: Learn How to Do Taxes on an Investment Property
Capital appreciation
Your investment can benefit from capital growth when you purchase it at a good price and the investment property rises in value. If you purchase the real estate property in a strategic location, its market value can increase over time and generate more profit, which will be realized as cash flow when the asset is sold. Apart from passive appreciation that comes as a result of time, the property owner can also increase the value of the property by improving the property – through forced appreciation. If it is a rental property, you can lower expenses and raise rents, thus increasing the total net operating income and the value building.
Related: 6 Things to Know About Real Estate Appreciation
High stability
The property market is usually less volatile than other investments like stocks and mutual funds, particularly during uncertain economic times. Even during hard economic times in the market, the unending demand for housing that is driven by steady population growth makes certain that the prices of investment properties are supported. This makes real estate investing a low-risk investment. Price drops aren’t real losses until the sale of the property. If the investment property is bought properly and manages to produce good cash flow, the investment can be sustained until when its price rises again.
Control over the performance of your investment
Unlike other types of investments relying mostly on economic conditions, real estate investments give you as the investor numerous options in terms of increasing the income and the value of your property. Since real estate property is a tangible asset, you have control over its growth in value or performance by doing proper maintenance, improvements, and addition of more features like extra room or garage. Moreover, you have control of where to purchase, how to purchase, and when to sell.
Predictability
Returns accruing from investment property are foreseeable to some extent relative to those from other classes of investment. As long as the property is well chosen, you can predict several months into the future and have an idea of the direction that the market pressures push, unlike the share markets which could change within a very short period of time. Investors are able to exploit this predictability by using market timing strategies to get better performance when using a buy and hold strategy.
There are different ways of getting a return on your investment
Apart from the common way of buying real estate property, holding it, and selling it some years later for a profit, you can also earn rental income by renting out your investment property to tenants or through flipping the property. Renting out your new acquisition could help in covering mortgage payments, insurance, and basic maintenance costs, and sometimes even provide extra cash in your pocket. Buying an investment property provides you with a valuable asset and, when done right, is a good way to build wealth and guarantee a comfortable retirement.
For many prospective investors, buying an investment property is alluring because it is a low-risk investment that comes with many benefits which set it apart from many other forms of investments. It is an investment that is quite easy to understand, not to mention its significant appreciation over time. Moreover, the overall cost of buying an investment property can be astoundingly low when you take into consideration your rental income as well as the tax benefits that you will have. This is why becoming a real estate investor through purchasing a property investment is a good idea. Even though investment property may not be as liquid as the stock market, its long-term cash flow can provide passive income and be a good retirement plan.
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