Posted over 3 years ago

What Makes Real Estate a Good Investment?

Investors flock to real estate for many reasons, including cash flow generation, appreciation potential, tax advantages, and the ability of some sectors, like multifamily or self-storage, to weather a downturn or thrive in it. Even so, commercial real estate is not the exclusive domain of the ultra-rich.

In this article, we will analyze what makes real estate such a great investment for all investors.

Profitability

Your goal in the markets is to achieve a good return on your investment one way or another. Commercial real estate offers multiple paths to profitability, including cash flow from tenant rents, property appreciation, and unmatched tax benefits, all of which we’ll explore a little bit later.

Passive Income

Real estate provides investors with the potential to generate regular passive income from their assets. You can either do this by acquiring properties and hiring property management companies to manage them or by investing in a real estate fund or crowdfunding project where experienced professionals handle the details, and you only need to cash checks.

Get involved in the real estate game today by Blue Ocean Capital. We can help you get started a long way ahead of most newcomers.

Appreciation

Often, commercial properties enjoy property appreciation, which is simply an increase in value over time. Commercial real estate assets can be acquired, generating cash flow and eventually being sold for a profit. Even though property appreciation is by no means guaranteed, buying in an area with strong underlying fundamentals can help to ensure that your asset gains value over time.

Buying vs. Renting

The number of Americans who rent rather than own their own home is at a record high, with over 100 million residents, or 34% of the total population, living in rental properties. Multifamily investors are in a good position to capitalize on this trend, which shows no signs of slowing down and seems to be accelerating.

Taxation

Among the major asset classes available to investors, real estate is arguably the most tax-favored. There are a few reasons why real estate excels in this regard:

Depreciation

A massive benefit of owning a commercial property is the ability to deduct property depreciation. The IRS defines depreciation as “an allowance for the wear and tear” of any given asset. By claiming tax deductions on income-producing properties, investors are able to recoup many of their costs.

Real Estate Tax Deductions

Similar to depreciation, rental property owners can deduct almost all their property management expenses. This includes mortgage interest, as well as the goods and services you use to run the property.

Control

In real estate, you have greater control over the direction and success of your investment. Investors in the stock market depend heavily on the management of the companies they invest in.

However, real estate investors have demonstrated the ability to impact their properties’ success or failure through direct management of their properties or by overseeing the operations of their property managers. Investors can boost returns by reducing vacancies, marketing to potential tenants, renovating and adding value to their properties, and undertaking various other strategies to increase cash flow and force appreciation.

Demand

After oxygen, water, & food, shelter is our most basic need. No matter how low the stock market goes, people will still need a place to stay at night. As we mentioned earlier, multi-family demand continues to grow year after year. As a result, there is more cash flow and less vacancy, and concurrently there is a countercyclical resistance to economic downturns.

When homeowners or renters downsize, they often choose to move into multifamily properties. Having a steady cash flow from renters can not only sustain you in a recession, but it can also allow you to take advantage of the discounted assets that will inevitably come onto the market during this period.

Diversification

Within the world of commercial real estate, one can diversify by investing in different types of properties like shopping, retail, self-storage, multi-family, etc. Multifamily, in particular, is an excellent alternative to traditional stocks and bonds, owing to its ability to withstand recessionary pressures, resistance to stock market volatility, steady cash flow, and potential for asset appreciation.

Predictable Cash Flow

Regardless of whether you acquire a rental property in the multi-family sector, retail, industrial, or shopping, you will benefit from regular cash flow from tenant rents. Cash flow is an excellent benefit on its own, but when used to leverage new property acquisitions through financing, it can be a substantial driver of short and long-term profitability.

Deferrable Gains

A 1031 Exchange allows commercial real estate investors to defer paying taxes on their gains and instead use that capital to invest in other projects. The 1031 Exchange is named after Section 1031 of the tax code, which allows individuals to sell assets and carry their basis into a new property of equal or greater value. Using the existing tax code, investors can sell investment properties and buy new ones, deferring taxes until the property is sold, or until they engage in another 1031 exchange.

Conclusion

Real estate is a good investment because it brings investors stable cash flow, appreciation potential, tax benefits, and may act as a shelter during recessionary times.

The benefits described above are also available to accredited investors and even to those who are just getting started in wealth-building.

If you’re looking to get involved yourself, Blue Ocean Capital offers access to private market real estate, making it possible for qualified investors to access the returns once reserved for institutional investors.

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