Advantages of Investing in Real Estate

Investing in real estate can be a smart move for several reasons:

Strong Returns

Real estate investments can generate consistent cash flow. In the U.S. market, the median return on real estate is 8.6% annually according to the S&P 500. Residential properties generate an average annual return of 10.6%, while commercial properties average 9.5% and REITs 11.8%.

Low Volatility

Real estate is generally more stable than the stock market. Unlike stocks, which can experience sharp and unpredictable changes in value, real estate values tend to fluctuate more slowly. This stability makes real estate a safer investment. According to a survey by the National Association of Realtors, many home buyers think the stock market is too volatile to be a reliable investment, making real estate a more attractive option for those seeking stability.

Diversification

The real estate market offers a wide range of investment opportunities, including public and private options, various property types, and different levels of liquidity. Investors can choose from different risk profiles such as core, core-plus, value-add, and opportunistic, each with varying levels of risk and expected returns.

Protection from Inflation

Real estate can be a strong defense against inflation. As the cost of living increases, rental prices usually go up too, which helps your investment keep up with inflation. For example, CoreLogic’s latest report shows that home prices increased by 4.9% from May 2023 to May 2024. The forecast predicts that this growth will continue, with home prices expected to rise another 3% by May of next year.

Tax Benefits

Real estate investments can offer tax advantages. One of the easiest ways to lower your taxes is to keep your investments for more than a year. If you sell a property within 12 months of buying it, any profit you make will be taxed as ordinary income. But if you hold onto the property for over a year, the profit will be taxed as a capital gain, which usually has lower rates.

At the federal level, most people pay a 15% tax on capital gains, and some may even qualify for a 0% rate. However, remember that many states also have their own capital gains taxes.