As you look for savvy ways to diversify your investment portfolio, the idea of investing in real estate may come to mind. At first glance, investing in real estate can seem riskier and more stressful than other forms of investments. After all, real estate investing generally involves applying for a mortgage loan, finding and managing tenants, absorbing losses related to property damage and more.
The Power of Leverage
Despite these realistic concerns, a smart real estate investment can deliver incredible benefits that are not available with other vehicles. For example, when you take out a real estate loan to purchase your property, you are maximizing the power of leverage. Rather than paying for the full price of your investment with cash, you can finance most of that cost.
Property Value Appreciation and Cash Flow
Despite the fact that you may only make a 20 or 30 percent down payment at the time of purchase, the full value of the investment may appreciate. The value of real estate can fluctuate, but real estate values have historically trended upward overall. At the same time, your rental property will produce income. This income will pay down your mortgage so that you steadily build equity. It also should ideally cover all related expenses and put some extra cash in your pocket every month.
There are also tax benefits associated real estate investments that are not available with most other types of investments. For example, you can write off depreciation and all operating expenses. In some cases, you can pocket a profit and legally report a tax loss. When you sell the property later for a potentially sizable profit, you could take advantage of a like-kind exchange to offset capital gains tax as well.
Keep in mind that some of the risks associated with property condition, rental collections and other aspects of operations can be moderated. For example, maintaining strict tenant selection standards may decrease the possibility of tenant-related property damage, evictions and more.
The bottom line is that real estate investing is not a sure path to guaranteed profits. However, with a smart strategy and with the regular investment of your time and energy, real estate can be a very lucrative vehicle