It's no secret that real estate is a profitable asset class that's popular among new and experienced investors alike. But what's the reason for that popularity? The question has more than one answer, ranging from something as simple as appreciation to the more complex subject of generational wealth.
We'll walk you through everything you need to know, detailing the top five wealth-building benefits of real estate.
When real estate investors enjoy a large windfall of money, appreciation is often the reason. The term refers to the rising of home prices over time. Even with fluctuating prices, real estate values have always increased in the long run, which is a reassuring thought for investors who are hesitant about this asset class.
As an example of the power of appreciation, consider leverage. If you purchase a property for $200,000 and it appreciates to $220,000, that property has resulted in a 10 percent return. Since you've likely used the bank's money and put 10 percent down, you've doubled your investment for a 100 percent return.
Inflation isn't often a positive topic of discussion, but it's a powerful wealth-building benefit in the realm of real estate. The majority of your most significant expenses remain fixed for most of the time you own the property. Combine that with rising rent and home values, and you start to see the potential.
Since it's reasonable to expect this trend to continue, investors should seek an asset where it's advantageous. When you take the other positive aspects of real estate investment on this list and look at them alongside inflation, it becomes clear why so many investors have trusted this asset class for long-term wealth creation.
3. Forced Equity
Appreciation is appealing, but some investors don't want to feel like they're at the mercy of factors they can't control. In these situations, investors can improve the value of their properties through renovations, upgrades and extra features, creating "forced equity." They'll often purchase fixer-uppers for this exact purpose.
The logic behind this form of forced equity is simple. You search for properties below market value, update the flooring, appliances and so on, and end up with something far more valuable than what you started with. It takes hard work and DIY experience, of course, but the results are often well worth the effort.
4. Generational Wealth
One of the most attractive aspects of real estate investment is the value it has for your own family. You can pass your properties down to your children, letting them enjoy the benefits of your investment long after you're gone. In this way, real estate creates lasting wealth that carries far into the future.
Of course, those who are interested in passing on their properties should consult with a lawyer to minimize taxes and preempt problems with inheritance. But once you've handled those details, you'll feel safe in the knowledge that your children will have some degree of financial security.
5. Tax-Free Profits
There are numerous ways knowledgeable real estate investors can benefit once you get a handle on tax laws. Real estate appreciation doesn’t get taxed, for example, and rental income is not subject to FICA taxes. And typically, capital gains tax rates are lower than ordinary income tax rates, although exact numbers shift with the times.
It's clear why real estate is such a popular asset class for wealth creation. Regardless of whether or not you're in the top income tax bracket, you'll see the advantages of tax-free profits. When you're planning your next investment, consider this aspect of real estate.
Build Lasting Wealth Through Real Estate
It's no secret that real estate is a profitable asset class, and now you understand several of the reasons why. As you search for new opportunities for investment, browse properties in your area and review your options. With research, planning and strategy, you'll see why so many investors like yourself have turned to real estate for wealth creation.
Holly Welles is the editor behind The Estate Update, where she shares real estate tips and ideas for home fixes.