Real Estate as An Investment Vehicle
Home ownership can offer many advantages over renting. For starters, there’s the ownership aspect itself. Possession of something tangible can provide a sense of worth and purpose. Further, owning something with an appreciating value adds wealth to a retirement portfolio. Owning property – or multiple properties – can provide an investor with a steady income stream. However, there are aspects beyond income that can repay a homeowner. Simply put, real estate as an investment vehicle still beats renting.
By in large, real estate is an appreciating asset, meaning home values will go up over time, especially if the homeowner treats the property with respect and keeps it well in line with market trends and values.
As the months and years go by, the home is gaining equity. In other words, the current market value could be much higher than the remaining mortgage – or even what the initial mortgage was at the start of the term.
This is a tangible wealth-building tool unavailable to those who rent.
Flipping and Renovating
One option that has gained tremendous popularity in recent times is property renovations, or “flipping” as it’s more commonly known. The goal is to find a good deal on a property that needs work and can be sold for a premium when the work is complete. This can be a good way to use real estate to build a nest egg or fill in gaps in finances where necessary. If a potential investor is handy with the tools of the trade, they can increase profits by doing the work themselves. However, this can take much longer and become a source of unwanted stress.
While renovating property seems like a quick and easy road to wealth, the opposite can also be true.
One thing to keep in mind, is that interest rates will be higher on properties that will not be owner-occupied. The longer the project draws out, the more interest will be paid on a mortgage that is more than likely in addition to the main residence of the buyer.
The good news is that even though interest rates might be higher, earnings are also more than likely increased.
The quicker option is to seek out a qualified contractor to complete the work. It will be done quicker with this option, but it will come at a cost.
Favorable Tax Treatment
The tax structure of real estate investing is another good reason it makes good sense as an investment tool.
Using a 1031 exchange, an investor can sell one investment property then buy another, paying no tax on your profit in the process. There are a few rules to follow with a 1031.
However, the main thing to remember when selling a property, is the proceeds must go into another qualified or “like-kind” property. In other words, one investment property must be exchanged for another.
Another key advantage is that a home can be sold and up to $500,000 of the gain on the sale can be excluded if the home has been lived in for two of the five years prior to selling. This applies to $250,000 for single homeowners.
Real estate investing is not without its risks. However, for the informed buyer, it can be a very robust investment strategy.