Why Should I Invest in Real Estate?
Why Should I Invest in Real Estate?
Real Estate Can Provide Much Better Yields Compared to Other Investments
The Rise of Real Estate
During the same time period and well into the 21st century, real estate investors have realized attractive returns due to the multiple income streams from real estate investments. Here is a look at some of the reasons why real estate can be beneficial for your investment portfolio:
• Rental yield – This is the percentage yield from direct rental income, it and can be calculated as either gross or net. Experienced investors prefer to calculate the net rental yield—which takes the expenses, taxes and other costs into account, and divides by the property value/cost.
• Appreciation – Rental properties normally appreciate in value with inflation. Increased value can mean sale and reinvestment in higher value properties, or provide an equity line of credit to use for other investments. This is the second, and a historically proven, value component of real estate investment return.
• Inflation-proof investment – Rents usually increase with inflation, while mortgage payments on the property remain stable. This increases cash flow, without the increased expense for holding the property. When inflation goes up, it can also mean more renters as mortgages become more expensive for average consumers. More renters increase demand, so rents can escalate.
• Leverage – Using leverage, while being careful to buy properties with good rental yields, provides greater returns. Of course, all leverage involves risk, so the successful investor must understand how leverage impacts their real estate investments.
• Paying down loans – Amortization, or paying down loans, frees up more investment resources to increase leverage. Some investors use increased equity in one property to free up funds to invest in others.
• Property improvement for equity – Many investors intentionally purchase properties at a value price, because they lack certain features or could use improvements. They have calculated that the value of the improvements will exceed the cost, resulting in an immediate increase in equity.
