One of the largest benefits of real estate investing is its passive income opportunities. You can use the income earned to build a larger real estate portfolio, pay monthly expenses or save for other financial goals. A few ways to earn passive income with real estate investments include: Real estate investors enjoy many tax benefits, including tax breaks and deductions, especially if they treat their real estate investments as a business. The IRS allows investors to deduct expenses involved in their real estate business if they can prove material participation. The expenses you may be eligible to deduct include the following:3. You Could Earn Passive Income
4. You May Enjoy Tax Benefits
- Mortgage interest: If you finance investment properties, you may be able to deduct the interest paid on the mortgage.
- Depreciation: Real estate investors can often deduct depreciation for residential and commercial properties over their useful life (27.5 years and 39 years, respectively).
- Cost of running the business: If you prove you materially participate in the business, you may be able to deduct the cost to own, operate and manage your investment property.
- In addition, if you use the 1031 exchange rule, you can defer taxes on capital gains earned on an investment property. With the 1031 exchange, you sell one investment property and, within 180 days, close on another real estate investment property, keeping the funds invested and deferring tax payments until you sell the final property and keep the capital gains.
It's important to talk to your tax advisor to see if these benefits apply to you.
5. Your Property May Appreciate In Value
Real estate properties typically appreciate over time, increasing a real estate investor's profits, especially if you invest for the long term.
You can turn property appreciation into cash flow by leveraging the profits with mortgage financing or selling the property for a profit. For example, if you purchase a property for $100,000 and sell it for $200,000, you walk away with $100,000 in capital gains before taxes and closing costs.
6. You Have The Potential To Build Capital
To invest in real estate, you need capital or money to invest in a property. Your first investment may be highly leveraged with mortgage financing. But you can build capital when the property appreciates, and you have equity. This allows you to increase your real estate portfolio by investing more capital.
To access the capital, you can sell the property and reinvest the funds in another property or use a cash-out refinance to access some of the home's equity, providing you with more capital to increase your real estate portfolio, earning more income.
7. You Could Have More Protection From Inflation
Some investments don’t keep pace with inflation, causing your dollar to be worth less than when you invested. Real estate, however, provides a hedge against inflation because as inflation rates increase, so do real estate prices typically. This allows your investment to keep pace with inflation and you to retain the power of the dollar.
8. You May Be Able To Finance Your Property
Leveraging your real estate investment is one of the best benefits of real estate investing. Unlike investing in stocks or bonds, you don’t need enough cash for the total investment cost. If you qualify, you can finance the purchase, investing only a percentage of the investment property’s cost.
Some real estate investors are also eligible to finance multiple properties, increasing the chance of higher monthly cash flow and allowing more opportunity for greater capital gains.
9. You May Be Able To Choose Your Level Of Involvement
Real estate investors can manage rental property themselves or hire a property management company to do it for them. This allows you to control your investments, whether you want a completely passive opportunity with higher costs, allowing a management company to handle it, or you want complete control over the rental property.
10. Your Property Could Be A Generational Investment
A real estate investment can become generational if you pass it down to your heirs, creating financial stability for future generations. Many investors create a family business by starting an LLC to own and operate real estate investment properties, passing it down to family members for many years.
