Investing in Real Estate - Why?

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Investing in Real Estate

In this edition of my blog, I wish to share my thoughts on why real estate should be an important part of your investment portfolio and what are the options available in India.

Investing in real estate involves purchase, ownership, management, rental and/or sale of real estate for profit. Real Estate has traditionally outperformed the equity markets. Micro market knowledge of the market makes it perfect for small savvy investors. Large institutions lag behind trends. Real estate is an asset form with limited liquidity relative to other investments, it is also capital intensive (although capital may be gained through mortgage leverage) and is highly cash flow dependent. If these factors are not well understood and managed by the investor, real estate becomes a risky investment. The primary cause of investment failure for real estate is that the investor goes into negative cash-flow for a period of time that is not sustainable, often forcing them to resell the property at a loss or go into insolvency. But still I would like to list few reasons that work in favor of real estate investments:

1. Gain more leverage. Real estate is one of the few investment vehicles where using the bank's money couldn't be easier. The ability to make a down payment, leverage your capital, and thus increase your overall return on investment is incredible.

2. Tax free cash flow. It's no secret that because of depreciation and mortgage interest deductions (if you leverage your capital), your cash flow should be tax-free. That's right! The far majority of the time an investor will never pay taxes on their cash flow and can wait for capital gains on the sale of the property in the future.

3. The tax write-offs against your other income. Depending on your income level, there is a good chance your rental property will not only give you tax-free cash flow, but an overage of tax deductions you can use against your other income. With that said, this is something you want to discuss with your tax professional before investing so that your expectations are realistic.

4. Increased tax deduction strategies. Rental property affords investors with another incredible opportunity to convert personal expenses to potentially valid business deductions. Don't forget that rental real estate is a business. This means that travel expenses to check on your properties and payments to family members who manage your properties (such as students away at college) can be deductible and increase the tax benefits when it comes to cash flow and the future sale of the property.

5. Rental real estate is a retirement plan. Buying a rental property is a significant commitment that you are required to commit to and maintain. You will always be grateful in the long-run when you don't give up on it and build future cash flow and wealth.

The far majority of us will never get rich overnight. It takes long-term investing and a diverse portfolio to build true wealth. Don't forget real estate as an important part of the equation.