You have accumulated some cash and are looking to park it in an investment vehicle which gives you good returns. Depending on your risk appetite, you have various options that include stocks, mutual funds, provident funds, bank saving schemes, gold, commodities, and of course real estate. There are pros and cons of each investment option, but since we are here to learn about real estate, I will focus on that alone.
But why invest in real estate?
Before I tell you the benefits of real estate, I must tell you clearly that all these benefits are for landlords and not for tenants. Life is not fair. Believe me, in the long run tenants will always be at the receiving end and not on the benefiting side. If you are currently staying in a rented house, I hope this article will motivate you to start taking real estate seriously and encourage you to invest in a property, however small it may be.
Here are top 10 reasons, that answers the question – why invest in real estate:
1. Capital Appreciation
Though every investment class has its own cycles of troughs and crests, history has shown that over long term real estate prices always go up. In a developing economy like India, real estate has given superior returns in the past and shall continue to do so in coming years. In fact, real estate markets in many areas have beaten much riskier equity markets. Those who know rules of the game tend to make much higher profits from real estate.
2. Attractive and Stable Income Return
A key feature of real estate investment is the significant proportion of total return, accruing from rental income over the long term. This helps reduce volatility as investments that rely more on income return, tend to be less volatile than those that rely more on capital value return.
3. Inflation Hedging
The inflation hedging capability of real estate stems from the positive relationship between GDP growth and demand for real estate. As economies grow and develop, added pressure is put on rental properties. This causes rental prices to increase, which will ultimately increase your revenue. Rents usually increase with inflation, while loan payments on the property remain stable. So, inflation actually helps landlords in increasing their monthly cash flows.
4. Tax Benefits
If you take a home loan to purchase your property, you can claim tax deductions on both principal and interest payments of your home loan. The principal payment portion can be claimed under section 80C of Income Tax Act and interest payment can be claimed as a deduction under section 24. Government doesn’t give such huge tax benefits on any other investment. In fact, if you have taken a joint loan with your spouse, both of you can claim tax deductions. Should we not call it a “killer income tax strategy” or rather “income tax killer strategy”?
5. Leverage
Another great benefit of a real estate investment is the power to use somebody else’s money to increase your personal returns. Since real estate is a tangible asset, banks are always eager to provide you a home loan or loan against property. Using Rs. 50 lacs to purchase three properties with down payments, instead of one for Rs. 50 lacs cash, can greatly increase returns. But remember that debt is the single most determining factor in both rise and fall of entrepreneurs and corporations. So you must do your calculations right before you leverage.
6. Lower Risk
Compared to paper assets such as stocks, bonds & mutual funds, real estate carries much lower risk. Even in a downward market your capital will not become zero whereas your investments in paper assets can vanish overnight.
7. High Control
Unlike stocks, bonds and mutual funds, an investment in real estate is backed by a high level of brick and mortar. This helps reduce the principal-agent conflict, or the extent to which the interest of the investor is dependent on the integrity and competence of managers and debtors. In real estate, you have direct control over your asset for example you can renovate it, take a loan against it, have proper insurance, control your tenants, decide when to buy or sell and all returns will accrue directly to you.
8. Financial Freedom
Many of us want to retire early but not at the cost of our lifestyle. To maintain our lifestyle, we need monthly cash flow. Most paper assets do not produce positive monthly cash flow. However, in real estate investment, you get rent every month which also takes care of the inflation and your capital is also protected. If you carefully plan your investments, Real Estate can give you financial freedom much early in life. The best part of a real estate investment is that you can do it as a business alongside your job and nobody questions it, not even your employer. Your job can pay your bills and help you get that loan to buy your property.
9. Portfolio Diversification
Another benefit of investing in real estate is its diversification potential. The addition of real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk.
10. Stability and Peace of Mind
Buying a home should be the first priority of any individual. Your home will not only give you stability and peace of mind but also make you emotionally much stronger to take higher risks in life. Once, you clear the loan of your first home, you may decide to go for second property and so on. It feels great to be called a landlord and collect rental income every month without having to put hours of work everyday.
Hope you enjoyed this post on “Why invest in Real Estate – 10 killer reasons”
Over to you
Like this post? Kindly give a google+1 or a facebook like. It will help more readers like you. Needless to say, it encourages us to deliver high quality content everyday.
Do you invest in Real Estate? Have I missed any major benefit of real estate investment? Please share your experience and leave your comments below.