Real estate fits well as a part of portfolio since it has certain qualities which can increase the returns of the portfolio.
Benefits of real estate investing:
a.Tax benefits :
There are several deductions that can be claimed on one’s tax return when they invest in real estate. These include maintenance, insurance, loan interest and agent fees. One thus may pay lower taxes.
b.Long term investment :
Most people desire to have an investment that will provide them with money after retiring .Real estate is very ideal for this because the prices of properties rarely decrease meaning that one can get a continuous income even after retiring.
c.Positive asset base:
Having an investment in real estate can come in handy for one who wants to borrow a loan. A potential lender may highly regard an individual who shows them the ability to repay the loans without defaulting. A real estate can be a good indication of such ability.
Real estate can also be used as security when borrowing home loans or car loans.
d.Safety aspect :
Since investments in real estate are relatively low risk, they are a bit safer than other forms of investment. There will always be demand for housing which means that there is no single time one will not earn an income from their investment.
e.Allows improvement of investment property:
While still providing cash flow from rent, a real estate can be improved so as to get the best price and higher profit in any case the owner decides to liquidate it.Modifications and upgrades made to the real estate investment property increase its value. They also help to retain the value of the property by keeping it interesting to renters.
Using leverage in real estate investing
When purchasing a house, you do not have to pay the full price. This is because the prices of house are higher than other investments. Leverage was developed to assist people to purchase a house.
How it works
With leverage, you can pay a small part of the total price of the house but still use it. It allows people to buy and flip a house .You must however complete the payment for the portion of the price of the house even when you have leverage. In addition, you do not have the total ownership of the house until you pay the remaining part of the price.
You may need to acquire a loan from a bank or other lending institutions so that you pay off the remaining part of the price of the house. Such a loan is referred to as mortgage. It pays of the remaining amount of the sale price of the house.Mortgage allows you to complete the payment of the price of the house through small installations of payment that can be done on a monthly basis. The payments made through this loan include the principal and the interest payments.
In the same way that you use leverage to purchase a new house , you can use it to flip your house .The two are different in terms of how much you are able to finance and use the leverage during negotiations of the terms of mortgage such as rates of interest and down payments .
Why use leverage?
Leverage works better in real estate than other investments because it is relatively easier to borrow money using real estate as security than other assets. However, it also works in stock investments by use of margin account but the rules are very strict because stock is an intangible asset.The advantage with real estate is that it will always be there and thus is relatively secure. Lenders easily give money to individuals interested in investing in real estate because there are a few risks involved than in other investments.
Though investing in real estate is very secure and brings in profits ,some of those who invest in it are not successful .The value of real estate has been known to fall instead of rising . Just like other investments, the value of real estate’s goes through the normal market cycle i.e. moves up and down.It is therefore crucial to come up with a long-term strategy because you may need to be in real estate investment for longer than you anticipated to achieve your goals of investment.