Reasons to Invest in Real Estate

The benefits of investing in land are numerous. With well-chosen assets, investors can enjoy predictable cash flow, excellent returns, tax advantages, and diversification—and it's possible to leverage real estate to build wealth. Thinking about investing in real estate? Here's what you would like to understand about land benefits and why land is taken into account an honest investment.

KEY TAKEAWAYS

• Real estate investors make money through income, appreciation, and profits generated by business activities that depend upon the property.
• The benefits of investing in land include passive income, stable income, tax advantages, diversification, and leverage.
• Real estate investment trusts (REITs) offer how to take a position inland without having to have, operate, or finance properties.

FlowCash 
Cash flow is the net income from a real estate investment after mortgage payments and operating expenses have been made. A key advantage of land investing is its ability to get income. In many cases, cash flow only strengthens over time as you pay down your mortgage—and build up your equity.


Tax Breaks and Deductions
Real estate investors can take advantage of numerous tax breaks and deductions that can save money at tax time. In general, you can deduct the reasonable costs of owning, operating, and managing a property.

Build Equity and Wealth
As you pay down a property mortgage, you build equity—an asset that's a part of your net worth. And as you build equity, you've got the leverage to shop for more properties and increase income and wealth even more.

Portfolio Diversification
Another advantage of investing in land is its diversification potential. Real estate features a low—and in some cases negative—correlation with other major asset classes. This means the addition of land to a portfolio of diversified assets can lower portfolio volatility and supply a better return per unit of risk.

Real Estate Leverage
Leverage is the use of varied financial instruments or borrowed capital (e.g., debt) to extend an investment's potential return. A 20% down payment on a mortgage, for example, gets you 100% of the house you want to buy—that's leverage. Because real estate is a tangible asset and one that can serve as collateral, financing is readily available.

Competitive Risk-Adjusted Returns
Real estate returns vary, counting on factors like location, asset class, and management. Still, variety that a lot of investors aim for is to beat the typical returns of the S&P 500—what many of us ask once they say, "the market." the typical annual return over the past 50 years is about 11%.5

Inflation Hedge
The inflation hedging capability of land stems from the positive relationship between GDP growth and therefore the demand for land. As economies expand, the demand for land drives rents higher. This, in turn, translates into higher capital values. Therefore, real estate tends to maintain the buying power of capital bypassing some of the inflationary pressure on to tenants and by incorporating some of the inflationary pressure in the form of capital appreciation.

Real Estate Investment Trusts
If you want to invest in real estate but aren't ready to make the jump into owning and managing properties, you may want to consider a real estate investment trust. You can buy and sell publicly-traded REITs on major stock exchanges. Many trade under high volume, meaning you'll get into and out of an edge quickly. REITs must pay out 90% of income to investors, so they typically offer higher dividends than many stocks.6

The Bottom Line
Despite all the advantages of investing inland, there are drawbacks. One of the main ones is the lack of liquidity—or the relative difficulty in converting an asset into cash and cash into an asset. Unlike a stock or bond transaction, which may be completed in seconds, a true estate transaction can take months to shut. Even with the help of a broker, it can take a few weeks of work just to find the right counterparty.

Still, land may be a distinct asset class that's simple to know and may enhance the risk-and-return profile of an investor's portfolio. On its own, the land offers income, tax breaks, equity building, competitive risk-adjusted returns, and a hedge against inflation. Real estate also can enhance a portfolio by lowering volatility through diversification, whether you invest in physical properties or REITs.