November 28, 2018
As many of you know, real estate investing is a great way to reach long-term financial goals. The most successful investors will agree that one of the keys to building wealth is to diversify investments. Millionaire investors allocate 20% of their investment capital to real estate, which is a very compelling argument that real estate investing is here to stay.
A few reasons real estate will remain a solid investment are:
– They are less volatile
– They offer increasing income streams
– The tax benefits
– Homes continue to appreciate
As we have seen recently, the stock market can prove to be incredibly unpredictable. It is affected by numerous outside factors that often feed off each other creating volatility. In fact, October 2018, is shaping up one of the most volatile months in recent history, even during the longest-running bull market since the 1940s.
The recent stock market activity shows that no matter when you invest, the same amount of risk is always present. Not to say there is no skill or strategy to successful stock market investing, but the high reward carries a high risk.
Real estate, on the other hand, is a much less volatile market. Over time risk is averted as you own a tangible asset that could appreciate. In the long run, even if the property or properties do not appreciate, the asset will build equity and you will still have an income stream. The equity built, even if there is a downturn in rental rates (which is unlikely), can be leveraged giving even more financial options.
One thing that is guaranteed is that rental rates will increase at a predictable rate. This is a well-known fact and one of the primary reasons people work so hard to purchase a home with a fixed rate mortgage.
According to the U.S. Bureau of Labor Statistics, rent in the United States increased 3.6% this year. In fact, since the year 2000, rental rates increased an average of 3.08% per year, while overall inflation in the U.S. was at rate of 2.11%. The increase in rental rates occurred even as the “Great Recession” devasted the real estate market and other financial sectors.
Historically, real estate investments are a good “tax shelter” due to the tax benefits afforded to owners of rental properties. These deductions do not appear to be going anywhere soon. In fact, the Trump Tax plan allows for even more tax benefits today and in the future.
The U.S. Tax code, with its many real estate related deductions, benefits real estate investors and continues to promote the purchase of real estate. How can something supported by the federal government every really go away?
Investors can write off depreciation, avoid capital gains taxes through 1031-exchanges, and can borrow tax-free against the equity in the asset.
The biggest tax benefit to real estate investors, and proof that real estate investing is here to stay, comes in the form of the pass-through deduction. The pass-through deduction is new, and it has a significant effect on real estate investing.
The pass-through deduction primarily affects the investment in real estate investment trusts (REIT) as it allows investors who earn income that “passes through” intermediaries deduct up to 20% of that income. The REIT is the intermediary.
For the reasons above, real estate investors can pay less in taxes than people investing in other financial markets.
The real estate market continues to perform very well, and property values are expected to rise over the next two years. It is forecasted that home values will increase 4.3 percent in 2019 and 3.6 percent in 2020.
The demand for housing is still higher than supply, which is driving values higher and higher. This is creating a situation where affordable homeownership, especially in urban environments, is not attainable for many in the population, leaving people no other option but to rent.
The continued appreciation and rising rents make real estate investing very attractive. More and more investors are turning to real estate as a primary vehicle to create wealth instead of just a means to secure a portfolio through diversification. Real estate is here to stay. If you have not done so already, consider real estate investing as you plan for financial success.