Why You Should Invest in US Real Estate
There are many reasons why you would want to add some real estate to your investment portfolio. We’re going to look at the benefits of doing so, while also discussing some of the challenges associated with this asset class. After all, it wouldn’t be fair to only give you one side of the picture.
The benefits of adding real estate to your investment portfolio.
Income and cash flow. Generally, most real estate investments are meant for income generating purposes rather than solely for capital appreciation. This is an added benefit of this asset class, especially for those concerned with seeking out these income producing investments.
Capital appreciation. Although this isn’t the whole picture, it can play a large role in the value of your investment. Not to mention that capital gains are taxed at a lower rate, which brings us to the next point.
Tax benefits. As we just mentioned, capital gains are taxed at a lower rate and so is rental income. Specifically, in the U.S. landlords do not need to declare rental income as self-employment income. As such, it receives some leniency in terms of taxation. In addition to that, tax deductions like property depreciation also help to lower the amount of taxable rental income. Finally, U.S. tax policy tends to favor long-term projects by providing lower tax rates. As you can see, there are multiple components to the tax-saving benefits of real estate.
Rental income typically covers mortgage payments. Often, the rental income received from your tenants is enough to cover your mortgage payments and then some. When this happens, your tenants are essentially building equity for you by paying the mortgage down. It doesn’t get much better than that.
Protection against inflation. Real estate investments are considered to be protected against inflation compared to other assets. This is because when the general price level inflates, so do the property values and rental rates. Thus, your rental property value and the rental rates move in unison with inflation rates to cancel out the effects.
Offers diversification to your investment portfolio. Real estate is a good way to diversify your portfolio beyond the typical stock and bond assets. This asset class is also considered to be safer since real estate doesn’t fluctuate as wildly as the stock market does.
Physical assets allow you for improvement. Specifically, this refers to the practice of upgrading your physical asset, or in other words the property. You can improve multiple aspects of the property to increase its overall value––something you can’t do with stocks.
The challenges associated with adding real estate to your investment portfolio.
Additional costs associated with a physical property. You must be aware of the costs of buying, selling, owning and maintaining a physical property. These are unique overhead costs associated with physical real estate investments.
Requires some form of management. Unless you plan to manage the properties yourself, you will need to hire someone. Although, this isn’t too different from paying a broker to manage your money.
What are different options for adding real estate into your portfolio?
We have many articles on different ways you can break into the real estate market. The two main routes are through:
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