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NOTE: The information provided on this website is in no way intended to provide financial or legal advice but rather examples that might be useful to consider.

What are the benefits of investing in real estate?

1) Leverage – Leverage is one of the most important principles in growing your money and you can take advantage of it through real estate ownership. In simple terms, leverage is when you take out a loan and invest a set amount of money to secure the loan. For real estate, instead of appreciation on just the amount of money you invested, there is appreciation on the full value of the property.

Example:

You make an investment in the S&P 500 which has historical average annual returns of 10% (approximation for the example). Your friend makes an investment in a condo that costs $300,000 and is expected to appreciate at 3% per year on average.  How will the returns compare in 5 and 10 years after the initial investment?

You invest $30,000 in the S&P 500. In 5 years the investment will have netted about $18,315 in gains. In 10 years the investment will have netted about $47,812 in gains.

Your friend puts $30,000 down on a $300,000 condo. In 5 years the investment will have netted about $47,782 in gains. In 10 years the investment will have netted about $103,175 in gains.

In summary, at the 5 year mark the property would yield about 2.6 times greater gains than the S&P investment. Similarly, at the 10 year mark the property would yield about 2.2 times greater gains of the S&P investment. Being able to invest larger sums of money generally allows you to make more money. With leverage, we can pack more punch in the money we invest.
 
2) Building equity – Building equity is one key advantage of owning or investing in real estate. When we rent, none of the money we spend is recaptured. When we own, we are still paying for a mortgage and bills but some of this money is recaptured (the money that is spent paying down the principal). When equity is built up to a certain point, we have the option to refinance and pull that equity out and use the cash for our next big move. Selling the property is another way to access the equity that we built in the property.

3) Tax benefits – There are numerous tax benefits for owning property. If you live in the home you own, the interest on the mortgage and property taxes are tax deductible. If you do not live in the property and rent it out, certain business expenses might be able to be deducted.

4) Appreciation – One of the most obvious advantages of real estate is appreciation. Properties generally tend to increase in value over time and can be a great shelter of your assets against inflation.

5) Cash flow – If you are looking to rent out your properties, income above the property expenses (mortgage payment, interest, insurance, HOA/condo fees, taxes, etc.) will mean positive cash flow. Positive cash flow on the property would mean a net income in addition to the equity that is built through the loan principal paydown.

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Other useful resources:
1) https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
2) https://www.investopedia.com/mortgage/real-estate-investing-guide/
3) https://www.irs.gov/faqs/itemized-deductions-standard-deduction/real-estate-taxes-mortgage-interest-points-other-property-expenses/real-estate-taxes-mortgage-interest-points-other-property-expenses-5