When building wealth, there is no shortage of investment opportunities. Stocks, bonds, mutual funds, ETFs, precious metals, and more all play a role. However, many of the world’s great fortunes are based on real estate investing. Let’s examine why real estate is a good investment and how you might build significant wealth. 

Reasons Why Real Estate is a Good Investment

Cash flow, passive income, tax breaks–the list goes on. Here are just a few of the reasons why real estate is a good investment:

There is a steady cash flow

As a real estate investor, you can generate a steady cash flow if your investment properties have tenants. Calculate your cash flow by deducting your mortgage payments, property taxes, insurance, and maintenance expenses from the gross rent.

Could have great returns

A long-term investment in real estate can bring great returns. Solid appreciation over time means you can sell the property for a substantial profit. Of course, there is no guarantee that an individual property will generate big returns but remember the real estate mantra: Location, location, location. 

Long-term security is an asset

The long-term security of real estate can make it a great investment. You are not just waiting for your real estate investment to appreciate. Instead, you are renting out the property and earning money every month. 

There are great tax advantages

One of the top reasons that real estate is a good investment involves its tax advantages. As per the IRS, various real estate expenses are deductible, including:

• Mortgage interest
• Property taxes
• Operating expenses
• Repairs
• Depreciation

Diversification means security

Real estate is an essential part of a diversified investment portfolio. Your real estate portfolio might remain relatively robust when the stock market tumbles during an economic downturn. When investing in real estate, consider portfolio diversification into different real estate types for further security during tough times. Besides single-family residential real estate, there are opportunities in commercial properties, apartment buildings, and other income-producing properties.

A reliable source of passive income

Investment real estate can create a reliable source of passive income. If you engage the services of a property manager, there is little you have to do daily. Instead, you can enjoy passive income from your tenant’s monthly rent checks.

You have the ability to leverage funds

Rental property investors do not usually pay cash for properties. Instead, they use real estate leverage and borrow most of the money from banks or mortgage lenders.

Many investors bought their first investment property by taking out a Home Equity Line of Credit (HELOC) on their primary residence. Most lenders allow homeowners to borrow up to 80 percent of their dwelling’s worth.

There is protection against inflation

Real estate investing offers some protection against inflation. Inflation raises the price of goods, but it also raises wages. Since wage growth is tied to rental prices, you can increase the rent on your rental properties once current leases expire.

You have a chance to build capital

Owning real estate is a great investment for building capital. When you sell properties that have increased in value, the cash is the capital you’ve built. The key to building capital in real estate is choosing properties likely to increase in value and biding your time until they appreciate sufficiently. It’s key to building long-term wealth.

Fulfillment and control are yours

Do you want to be your own boss and have more control over your destiny? That’s an attractive component of investing in real estate, although this fulfillment comes with greater responsibilities. As a landlord, you also play a vital role in your community.

The Risks of Real Estate Investing

In general, real estate is a good investment over time. However, risks are involved, and it is possible to lose money. By knowing these risks, you can take steps to avoid them.

Some market risks exist

You expect to receive rental income from your investment properties. That income also goes toward paying your mortgage and other property expenses. What happens if you experience a long-term vacancy? Tenants break contracts and can leave you hanging. Are you prepared to not receive rental income from a dwelling unit for a few months or more?

Remember that investment properties are illiquid except for real estate investment trusts. If you need to obtain cash quickly, that’s a problem.

Property risks

Investment properties require upkeep and maintenance, and these are considerable expenses. You must budget for ordinary and major repairs, such as roof replacement, HVAC repair, or plumbing issues. Properties are also subject to fire, flooding, and natural disasters. Make sure you have adequate insurance in case of such a calamity.

Management risks

As a landlord, the last thing you want are tenants who don’t pay their rent or cause problems. Mitigate some management risks by carefully screening potential tenants for your rental property. That includes running a background check, obtaining their credit report, and rental history.

Issues with interest rates

Investing in real estate investing is inextricably tied to interest rates. These rates affect home value, with lower rates bringing higher demand and rising interest rates dampening buyer enthusiasm. Higher rates are inevitably an issue for the real estate investor, but that doesn’t necessarily mean you should avoid buying property in a high-interest-rate environment.

For example, look into adjustable-rate mortgages when rates are rising so that you can make lower monthly payments during the period the rate is in place