8 Specific Advantages to Investing in Real Estate
There are several advantages to invest in real estate over other investment vehicles.
Leverage is simply the extent to which debt is used to finance real estate. Successful real estate investors optimize (not maximize!) their leverage. The general rule is “Borrow to buy, sell for cash.” More leverage can make a good investment a great investment. Wise real estate investors generally look for those properties that provide the most financing.
Operating leverage is a characteristic commonly found in real estate properties due to its large proportion of fixed cost to total costs. This characteristic can be described in terms of the relationship between sales volume and profitability of a piece of property. Commercial real estate generally has a large degree of operating leverage due to its fixed costs.
Real estate values tend to rise with inflation. In fact, much real estate often rises faster than inflation because it is in relative limited supply compared to other consumer goods and services. Because real estate supply tends to be inelastic (insensitive to prices), as demand increases prices will rise faster in this sector.
Two important advantages come into play here. The first is interest costs. Interest costs can be fully tax deductible for your personal residence (up to a limit) or for any commercial real estate investment. This means the cost of funds is reduced by your marginal tax rate.
Investing in Real Estate Is Like Owning Your Own Business
Many individuals want to gain more “control” over their lives. It is not uncommon for such individuals to want to “start their own business” to gain more control over their lives. Commercial real estate is an activity you control entirely. You find the opportunities, arrange the financing, bring all the elements together, and create something where there was nothing before.
Debt in an Inflationary World Is Good
Commercial real estate investors are debtors. They borrow money now to pay it back later. In an inflationary environment this confers a tremendous advantage to the buyer. In theory, interest rates adjust for the level of inflation by adding an inflation premium to the real rate of interest. In the real world, this adjustment process appears slow and uncertain.
Compounding Cash Flows
This is the miracle of compound interest. In finance, the tortoise not only finishes the race, the tortoise wins the race too! Rabbits show a burst of speed that looks good for a short time, but they rarely finish the race and almost never win the race. Compounding cash flows are the surest way to wealth creation.
Social policy in the United States encourages home ownership. This has resulted in financial and banking policies that make acquiring a home relatively easy. This happens because houses can be bought for very little cash up front and interest payments are subsidized by making them deductible against earned income. Even a person with very little income can enjoy the benefits of financial leverage.
TRY THIS LINK AND GET MORE INFORMATION RELATED TO THE 6 DIFFERENT WAYS REAL ESTATE INVESTING MAKES YOU MONEY.