Why invest in real estate? Here are 6 great reasons:

I’m happy to agree that real estate might not be the right investment for everybody, but I think a lot of people are scared away from real estate because they simply don’t know the benefits, or because they over-amplify the risks. Here’s a brief rundown of 6 things that can make real estate a smart investment.

#1) Understandability. Warren Buffet has famously said he wouldn’t invest in industries he doesn’t understand. It takes a bit of time to learn basic real estate concepts, but at its core RE is really pretty simple. It’s certainly simpler than trying to understand what is happening with all the companies and industries that make up your stock fund. Or what’s happening with the Chinese yuan, which is somehow affecting all those companies and industries that make up your stock fund…

#2) Cash flow. This one is easy. You own a place, you rent it out. The money that’s left after your debt payment, taxes, insurance and repair/maintenance issues is your cash flow. At first, with a property or two, it probably won’t seem that impressive. A couple hundred bucks a month here, another couple hundred bucks there. But if you continue to grow your portfolio (and especially as your loans get paid off) those numbers start to snowball.

#3) Leverage. Most of the time, when you buy a property, you’ll be taking out a loan. This is actually a financial advantage to an investor, rather than a disadvantage. Here’s why: Say you buy a house worth 100k, and pay a downpayment of 20k. You use a 15 year mortgage. If you rent that house out, bringing in enough to cover your payments and expenses (and hopefully some cash flow, too), at the end of 15 years you will own that 100k house outright. Did it cost you 100k? No. It cost you 20k, because the rest was paid by your tenants. Now say that house gained value over the past 15 years and is now worth 200k. It still only cost you 20k. That’s leverage.

#4) Depreciation. Depreciation doesn’t sound like a good thing, does it? But in this case we are talking about depreciation in terms of taxes, and it actually is a very good thing. If you own investment property you are required to deduct a portion of the value of that property each year from your income. This is what’s called a “paper deduction”, meaning that you are deducting money that you don’t actually spend. Which really means you only pay tax on a portion of the income you bring in, not on all of it. (This is actually a deferral of taxes, and is something that comes into consideration if you sell. But overall, it can make a huge cut in the amount of tax you pay)

#5) Tax benefits. Depreciation (mentioned above) I can be a huge tax benefit, but there are others, too. Even though you are essentially working for yourself as an investor, rental income is usually classified as passive income, so you won’t be paying self-employment taxes on it. The ‘depreciation recapture’ mentioned above can be postponed ad infinitum by using something called a 1031 exchange when you sell and “move up” to a bigger property. If you leave your investment property to your heirs, all that accrued depreciation goes “poof!” and disappears. So they can sell without paying capital gains taxes at all, or start depreciating the property all over again.

#6) Appreciation. Real estate generally increases in value with time. Now, anyone who lived through the financial crisis of 2008 is right to be a bit leery of appreciation. There can be fluctuations, but in the right markets at the right time you can create a lot of wealth through appreciation, especially if you add in the power of leverage.

Taken all together, this adds up to a pretty powerful set of advantages for real estate investors!