Many personal finance experts consider real estate to be the number one way to build wealth. Whether you buy a single-family home that you rent out, or a percentage in a commercial complex, personal finance experts agree that real estate allows you to build tangible assets that appreciate in value long term while giving you short-term cash flow.
If you’ve been on the fence, here are some answers to the question “why invest in real estate?” that you can’t ignore.
What is real estate investing?
Real estate investing is the purchase, management, and sale or rental of real estate for profit. Investing in real estate differs from home ownership in that the primary reason for owning a home is to live in it, while the primary reason to invest in real estate is to create value and wealth. There are plenty of options when it comes to real estate investing. These include:
- Residential properties: Single-family or multi-family homes that you can lease out for rental income.
- Commercial properties: Office buildings or retail properties that can be rented out to businesses.
- House flipping: Buying an undervalued property, spending money to renovate or fix it up, and selling for a profit. For more information, click here.
- REITs (Real Estate Investment Trusts): Stocks in companies that own real estate, usually commercial real estate.
- Fractional real estate investing: An investment structure that allows you to buy a portion of a home or commercial property instead of the entire property. Arrived specializes in this type of real estate investing. For more information on the pros and cons, click here.
13 Reasons to invest in real estate
When it comes to investment classes, few offer as much security, reliable cash flow, and asset appreciation as real estate. And this is why, even in down markets, real estate investing is the primary way of wealth building for many investors. Here are 13 excellent reasons for investing in real estate.
1. Rely on predictable cash flow and passive income
Not all investments provide monthly income. While stocks and mutual funds may provide quarterly or annual dividends, single-family or multi-family homes that you can rent out give you consistent and reliable cash flow. This is mostly passive income that you don’t have to show up to earn, especially if you work with a property management company that takes care of finding renters, as well as maintenance and repairs.
The predictability of rental income is one of the biggest reasons to invest in real estate. As long as you have tenants, the rental income is money you can count on, including the mortgage payments on the property.
2. Invest in a historically high-performing market
Real estate is known for its historically high returns. Not only do property values increase over time, resulting in a profit, but its low volatility makes it a safer bet. The findings from an in-depth study that Arrived commissioned in 2021 revealed that investing in single-family rental homes over the preceding 20 years would have resulted in an 11.7% annual return on investment, outperforming the S&P 500’s annualized return of 9.43% during that same period.
3. Get access to low-cost financing
As a first-time or beginner investor (or even as an experienced one), you’re unlikely to buy property with an all-cash offer. That means you’ll need to borrow money from a bank, mortgage lender, or credit union. Real estate is one of the few investment classes where it actually makes sense to borrow money. As long as you have good credit, a steady income, and the ability to pay back the loan, you can get started with a down payment as little as 10%.
Debt financing in real estate is not only encouraged, but because it’s common, it’s also cheap. Mortgage rates have been consistently low over time. You could be paying 3-4% interest on your property loan while seeing 10% or more returns on that same property, and if interest rates go down, you have the option to refinance.
4. Diversify your investments
Asset diversification is not only smart, but necessary. Real estate provides a solid level of security to your investment portfolio if you’re currently only invested in the stock market. While the returns from the stock market may be higher, the losses can be acute and sudden. If you’ve diversified with real estate, you minimize your risks during an economic turmoil and may even find that the value of your property continues to rise.
Within real estate, too, there are many asset classes to choose from, including single-family homes, commercial properties, vacation rentals, and more. And, of course, you can diversify further by distributing your investment across different properties in different neighborhoods or even cities and towns.
5. Invest in a tangible asset
There is something to be said about a tangible asset—something you can see and touch that gives you more of a sense of ownership and security. If the stock market crashes, your investment could be reduced to next to nothing overnight. That’s less likely with a property, even in a bad real estate market. Even so, having a tangible asset standing means there will always be some value in your investment and potential to force appreciation. A real estate investment is also one of the easiest asset forms to pass down to future generations.
6. Tap into a less volatile market
People will always need a place to live. Businesses, especially in certain sectors, are always going to need commercial properties to rent. You’re always going to want to stay in that beachfront property on holiday. It’s the necessity of real estate that makes it such a safe and secure investment.
Not only does real estate stand up to inflation year after year, it actually performs better. You can even take advantage of down markets by buying low and selling when the market picks back up again, which – if you’ve made a smart buy – it almost always does. Plus, real estate doesn’t have day-to-day fluctuations. It is a long-term investment that typically trends on an upward trajectory.
7. Capitalize on tax benefits
While homeowners don’t get a lot of tax advantages, buy a home as an investment and suddenly, a variety of options are available to you. As a real estate investor, you’re eligible for a number of tax breaks and benefits that can add up substantially. Not only can you deduct expenses incurred to maintain the property (repairs, ongoing maintenance, depreciation), but the ones involved in handling it (traveling to the property), owning it, and marketing it, too (property taxes, mortgage interest, property management fees, property insurance, expenses incurred to find renters, etc.).
When you sell your property, any gains will be taxed as capital gains, not income, which are taxed at a lower rate. If, instead, you use the money from the sale of one property to buy another, you can defer those capital gains as well.
8. Hedge against inflation
Real estate investments are often a hedge against inflation in three distinct ways. One, when the price of gas, food, and clothing is rising, so is the rent. So if you’re renting out a property, you’ll begin to see higher monthly income on your investments. Two, your property appreciates in value, meaning you’re building more equity. And finally, three, while inflation is causing the rent payments to rise, the interest payments are still locked in at lower interest rates, which means the cash flow from the property could increase with inflation (as long as you don’t have expensive repairs).
9. Choose from many investment models
As a real estate investor, you have access to a wide variety of asset types and classes to choose from. You can specialize in one type of investment or diversify and slowly build up assets in many different classes.
You could buy single-family homes and rent them out. You could buy multi-family apartments. You could invest in commercial real estate. You can buy a run-down property and flip it. You could buy a vacation rental. Or you could rent out all or part of your property as a short-term rental.
And just as there are different types of properties, there are different ways of investing. With real-estate investment trusts (REITs), you can buy stock in a company that has several real-estate holdings. And with fractional real estate investing, you can purchase a portion of a home or commercial property, sort of like crowdfunding but for real estate. With Arrived, you can get started in fractional real estate for as little as $100.
10. Get long-term security
If you’re investing in real estate, you need to be in it for the long haul. And if you do commit to real estate, it will provide you with more cash flow, security, and stability than any other investment. As we’ve mentioned, real estate appreciates with time, so if you can hold on to it, you not only get the advantage of monthly income (assuming it’s a rental), but you also get capital gains when you’re ready to sell.
It’s important to remember that it’s not just buildings that appreciate in value over time, but land. In some markets, the land can end up being more valuable than the actual property itself. Plus, as you pay off the loan on the property and its value appreciates, your equity in the property, and therefore, your capital gains grow as well.
11. Force appreciation
What makes real estate investing truly unique is that, while the value of a property will naturally increase, you can also force appreciation on your investment. Buy an undervalued property, fix it up, complete some renovations, and suddenly the sales price is a lot higher than what you bought it for (check out the BRRRR method if this interests you).
Forced appreciation refers to the extra value you create when you put money into a property, which will then reflect in revenue. This forced appreciation can come in the form of minor fixes (redo the interiors) or major ones (add a pool or update the kitchen), and can lead to both an increase in the value of the rental property as well as the rent.
12. Leverage your equity
Your equity in a property is the value of the property minus what you owe on your mortgage. Unlike other investments, however, you can leverage a large portion of this equity to invest in more real estate.
For instance, if your investment property is worth $200,000 and your equity is $100,000, then you may be able to borrow up to $80,000 against that equity to invest in more real estate and further build your portfolio. This can be an easy way to grow your real estate investments without having to come up with an additional 10-20% for the down payment on a new real estate investment.
13. Start as small as you’re comfortable with
You don’t need a lot of money, a high net worth, or be an accredited investor to get started with real estate investing. If you’re surprised to hear that, don’t be. Not only can you invest in real estate with a small down payment (often 10% of the home value) and low interest rates, but there are a lot of options available to you outside of the traditional models as well.
REITs (real estate investment trusts) and fractional investing are two models that allow you to get started for as little as a few hundred dollars, which means that you don’t have to scrimp and save for years before you can start building your real estate portfolio.
Easily invest in rental homes
As you can see, there are many excellent reasons to invest in real estate, including the fact that you can create cash flow immediately and build a safe, secure, and long-term asset that will pay, quite literally, for years to come.
While residential real estate has been the best long-run investment in modern history, operational headaches and larger upfront financial commitments prevent many people from participating. At Arrived, our mission is to empower the world to build wealth through modern real estate investing on their own terms. Now, you can buy shares of properites, earn rental income, and build equity through home appreciation, all while we handle the rest. Browse through available properties to start investing hassle-free in real estate today.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice. View Arrived’s disclaimers.