From the earliest centuries, owning property was a sign of wealth. Kings and queens worldwide sent ships to find and conquer new areas, adding to their vast collections of land. The race to obtain ownership of new and exciting places drove many to leave everything they knew behind. The United States itself was settled and expanded by people who wanted a place of their own.
Establishing land rights gave the owners a sense of security that could be passed down for generations. It should be no surprise that we continue in this pursuit today. The desire to own property is built into our DNA. After thousands of years, it is understood that owning real estate generates wealth and is a smart addition to your financial portfolio. Below is a breakdown of why this is so.
Table of Contents
Appreciation Over Time
In the early 1990s, a young couple purchased an older home in the Mission District of San Francisco. They bought it for $200,000 and, over the years, made improvements, restorations, and additions. The neighborhood changed significantly in the 20 years they lived in that home. Tech companies moved in, creating more demand for housing, and by 2015, that now not-so-young couple was able to sell their home for over $1 million–a huge return on their initial investment.
Real estate acquisition is a fantastic option for the patient investor to build wealth. With wise purchases, property values tend to rise significantly over time. Though markets fluctuate, real estate generally trends upward. As property values increase, so does your investment. When the time is right, you can sell your investment for profit, significantly contributing to your wealth.
Tax Advantages
Owning real estate gives you access to many tax advantages, allowing you to pay less in taxes. When you own rental properties, tax deductions can allow you to keep more of your profit. Property taxes, interest accrued on loans, maintenance expenses, property management fees, and depreciation can be tax write-offs. Other tax write-offs may include advertising expenses, business equipment purchases, travel, and any money spent on legal or accounting services. These write-offs reduce taxable income, increase after-tax returns, and make your investment more profitable.
Inflation Buffer
Inflation can negate the slow growth of certain investments. However, as prices across the country rise, so do property values. Rental units can become high-return property investments during times of high inflation. With the ability to rent at increased prices, pressure from inflation is passed down to tenants, widening profit margins. Selling property during periods of high inflation may be tempting, but it may not be the best option. Inflation comes and goes like waves, and riding out the wave can be beneficial in the long run.
Equity
Equity refers to the value you hold in your property. Growing your equity increases the value of your portfolio. You can increase your equity in a couple of different ways. The first is by reducing the difference between the mortgage and the property value. As you pay down your mortgage, the equity you hold in a property increases. The second way to build equity is through making additions and improvements to your property that increase the value.
Increasing your equity helps increase your cash flow and gives you more flexibility as you grow your real estate portfolio. Waiting for an investment property to increase in equity requires patience and a finger on the market's pulse to know the right time to sell, but it will provide tremendous dividends in the future.
REIT Options
Real Estate Investment Trusts, or REITs, are a good first step for those just getting started in real estate investing. REITs are companies that own, operate, and finance many types of income-driven properties. Investors can make money from real estate without the pressures of purchasing or managing the actual properties.
Like investing in the stock market, real estate money is pooled with other investors and put towards shopping centers, hotels, apartment buildings, or other commercial properties. Since the 1960s, REIT funds have built many types of buildings nationwide. In the last 25 years, investments in REITs have increased significantly, allowing investors to quietly build their real estate portfolio without the emotional investment that can come with property ownership.
A Wise Investment
There are many reasons investors choose real estate as a means to grow their wealth and diversify their investments. Fluctuations in real estate markets can make buying property seem risky, and some are. However, property investment companies can help you make wise decisions about which properties to invest in. They can even help you manage, market, and maintain your investment portfolio. Is real estate worth the investment? Absolutely.
