5 Benefits of Investing in Real Estate
Investing in real estate is a great way to obtain cash
flow and/or capital gains while you have someone else
pay your mortgage, but there are also other benefits to
investing in real estate.
1. Cash Flow
Cash flow, the most obvious, is the income that is
generated from the rental income after your expense have
been paid. This is money going into your pocket every
month -- like an extra pay check -- and this can
increase over time as rent goes up with the market.
Historically rental rates have gone up in Hawaii, so
potential exists for your monthly cash flow to increase
over time as rental rates rise.
2. Capital Gains
Capital gains or appreciation is the increase in the
value of the property after time. We have seen prices
double in Hawaii a couple of times in the past and all
you had to do was to own the property to take advantage
of this increase. It’s an added benefit of owning a real
Using leverage to invest in real estate is a benefit
that cannot be attained with other investments. For
example, when purchasing stocks it would cost you
$200,000 to buy $200,000 worth of a particular stock.
When purchasing real estate, you could purchase a
$200,000 investment property but only need to pay cash
for 20% ($40,000) of the total property price. If prices
go up 5% in this scenario, the increase in value to both
the stocks and the property is $10,000, but with the
real estate purchase it only cost you an upfront
investment of $40,000 to have the property value
increase by $10,000, whereas with the stocks it cost you
$200,000 to make the same $10,000.
Even if real estate is a high-cost investment, less
out-of-pocket is usually required to purchase an
investment. This all depends on your borrowing
qualifications with a financial institution. The amount
of cash that each individual buyer needs to have on hand
to purchase a property all depends on their personal
borrowing qualifications with a financial institution,
and the best thing to do is to talk to a loan officer to
find out your buying power and to set out your options.
4. Inflation Resistance
Since your monthly mortgage payment is fixed, there is
inflation resistance with real estate. Goods and
services go up in price, but your monthly mortgage
payment does not. You may actually increase your income
when you raise the rent over time for your renters and
not for you.
5. Tax Incentives
The not-so-obvious benefits are the tax incentives:
depreciation, business expense deductions, investing
tax-free with self-directed IRAs and my favorite, the
IRC (Internal Revenue Code) 1031 Exchange. In an IRC
1031 Exchange, an investor is able to sell their
investment and buy other, like-kind investments, tax