Generally, investing in real estate involves the use of proven and tried strategies that are used by people in order to build wealth. While real estate investment is not rocket science, it does require you to do your homework. So if you are looking to invest in real estate as an opportunity to become an overnight millionaire, you are likely to be disappointed. However, for those who seek a long-term and solid investment strategy, real estate is the way to go. In this article we will take a look at four benefits of investing in real estate.
Operating Leverage
This is a characteristic that is common in many real estate properties as a result of the large proportion of total costs. It is described in terms of the profitability and sales volume relationship of the property in question. Commercial real estate is synonymous with a high degree of operating leverage attributable to its fixed costs.
When you have lower fixed costs in relation to variable costs then small sale increases are likely to generate large profit increases. Conversely, high fixed costs mean that you require a substantial sales volume in order to break even.
Financial Leverage
Since leverage denotes the amount of debt used in refinancing real estate, it follows that successful investors ought to optimize and not necessarily maximize their leverage. You should then borrow to buy and sell for cash. Therefore, more leverage can transform a good investment into a great one. And this perhaps explains why wise real estate investors opt for properties providing the most financing.
In order to optimize leverage, it is advisable to have a sound strategy that you employ in identifying ideal investment opportunities. This may involve strategies that minimize the money needed to acquire a project in addition to divestiture strategies which seek all cash exits.
By Nicci Romanovsky under CC BY 2.0 license
Inflation Resistance
Inflation influences real estate values. In fact, values of real estate properties tend to rise much faster than the inflation rate as the former is in relatively limited supply in comparison to other consumer services and goods. Since real estate is insensitive to prices (or elastic) as demand rises, prices tend to increase much faster in this sector.
However, it is always prudent to exercise caution as much depends on the demand and location of the property. You should, therefore, be extremely vigilant when selecting real estate opportunities.
Tax Advantages
Real estate confers tax benefits to investors in two major ways with the first being interest costs. These are fully tax deductible for commercial investments and even your personal residence but up to a certain limit for the latter. This means that your marginal tax rate will result in reduced costs of funds.
The other vital tax advantage to investing in real estate is being able to depreciate any property that is being rented. This is because depreciation is a legitimate and non-cash deduction which can be used in offsetting revenue that would normally be subjected to taxes. This means that if you incur a loss on your investment, you should use it to reduce your personal income thereby lowering the amount of taxes you are eligible to pay.
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