Top Benefits of Investing in Real Estate

If you’re new to real estate investing or seeking to expand your knowledge, you might wonder, “What are the benefits of investing in real estate?” If you find yourself in this position, welcome to 37th Parallel Properties; you’ve come to the right place.

This comprehensive article will delve into the multifaceted world of real estate investing and highlight its myriad advantages to investors. 

5 Main Benefits of Real Estate Investing

For a more in-depth exploration of the core benefits of real estate investing, watch our webinar, “Passive Investor’s Guide to Multifamily Real Estate.”

To provide an overview, here are some of the essential benefits you can expect when investing in apartments:

      1. Tax Benefits
      2. Cash Flow and Equity Growth
      3. A Proven Hedge Against Inflation
      4. Diversification From Paper Assets Like Stocks and Bonds
      5. An Evergreen Business Model Centered on The Basic Need of Shelter

Let’s dive deeper into these compelling benefits of investing in real estate.

Real Estate Investors Enjoy Tax Advantages

One of the primary reasons many investors opt for real estate is its array of tax advantages. The Internal Revenue Service (IRS) incentivizes real estate investments by providing tax breaks to investors. 

At the core of these incentives lies the concept of depreciation, which allows real estate investors to claim paper losses even if their properties appreciate. This unique benefit is outlined explicitly in the tax code, offering investors a tangible advantage.

If you’re keen to explore this topic further and understand the intricacies of tax benefits in real estate, consider perusing the following articles:

Seven Tax Incentives for Apartment Investors

Bonus Depreciation – Dramatically Cut Your Taxes With Real Estate

Using Rental Property Depreciation to Reduce Your Tax Burden

You can also explore the subject by watching our video presentation, “Apartment Investing Tax Advantages for Passive Investors,” which is available in our learning center’s video section.

Want to learn how you can get stable tax-advantaged income and equity growth in today’s market?
Get access to our newest investment platform:

Steady Cash Flow

Real estate investments offer multiple avenues for generating income, including: 

  • Cash Flow
  • Appreciation
  • Principal Paydown / Amortization
  • Tax Benefits

While we’ve touched on the tax benefits earlier, let’s now focus on the importance of cash flow

All the income generated in rental properties, such as apartments, contributes to the Gross Operating Income (GOI). After deducting all reasonable and necessary operating expenses, you arrive at Net Operating Income (NOI).

This NOI can cover debt service, distribute income to investors, replenish reserves, and facilitate capital improvements. Consequently, the higher the NOI, the greater the recurring income for investors in that property. 

Passive Income Through Investment Properties

Income derived from real estate investment can be considered passive or active, depending on whether you participate materially in the operations. 

Active participation demands time, experience, and expertise to acquire, manage, and dispose of real estate assets. If you lack these resources, you may find tremendous success as a passive investor who invests fractionally alongside other investors by leveraging the expertise of professional real estate asset managers.

Building Equity and Wealth

In addition to generating rental income, real estate investments offer avenues for building equity and accumulating wealth through two fundamental mechanisms:

  • Mortgage Paydown: As rental income is collected, a portion of the Net Operating Income (NOI) goes towards servicing the property’s debt. Some of this money covers the mortgage interest (which is tax-deductible), while the rest reduces the principal balance. Over time, this process accumulates equity in the property.
  • Forced Appreciation: Commercial real estate, including multifamily properties, is valued based on the NOI. Enhancing the NOI by increasing revenue, reducing expenses, and improving tenant retention directly contributes to building equity in the property.  

Long-Term Security Amidst Inflation

In recent years, we’ve had heightened inflation, causing erosion of purchasing power. How have your investments fared during these times? 

Investments that fail to outpace inflation result in a loss of real value. Fortunately, multifamily real estate has a historical track record of outperforming inflation and serving as a reliable hedge against this economic challenge. 

For example, consider the combined annual inflation rate for 2021 and 2022, which is 12.7%. Private real estate (NFI-ODCE) exhibited a robust performance of 29.64% during this period. 

In contrast, the stock market delivered a 7.45% combined return, while the bond market suffered a 14.5% decline during the same period. The chart below visualizes these comparisons.

Source: S&P 500, Bloomberg U.S. Aggregate Bond Index, NCREIF Fund Index – Open End Diversified Core Equity

Diversification of Investment Portfolio Assets

Another one of the benefits of investing in real estate is diversification. Diversification is a cornerstone of modern portfolio theory, prompting many investors to incorporate real estate properties into their investment portfolios.

Low Correlation With Stocks and Bonds

When considering diversification, it’s crucial to examine investment correlation, a statistical measure of the relationship between two variables.

In this context, correlation coefficients range between +1 and -1. A coefficient of +1 denotes a perfect positive correlation, implying that the two variables move in tandem. 

Conversely, a -1 coefficient signifies a perfect negative correlation, indicating opposing, mirrored movement between the variables. A correlation coefficient of zero signifies complete independence between the variables. 

Investors prioritize diversification to mitigate portfolio risk and real estate ownership holds a long-standing reputation for maintaining low correlation coefficients with both stock and bond markets. This characteristic positions real estate as an ideal choice for diversifying investments. 

Potential Hedge Against Economic Recession or Inflation

Real estate’s resilience extends beyond serving as an inflation hedge; it also performs admirably during economic recessions

Recessions, characterized by two consecutive quarters of GDP decline, have occurred multiple times throughout history. A review of these periods reveals that, despite economic downturns, rent growth for apartments remained positive in nine out of ten recessions over the last seventy years. 

Vacancy rates have experienced only negligible increases during recessions, never exceeding more than a one percentage point gain. Apartments have historically demonstrated strong occupancy rates, maintaining stability in both prosperous and challenging economic climates. 

For deeper insights into multifamily real estate’s performance during recessions, explore these informative articles:

Freedom, Flexibility & Autonomy in Your Investment

Real estate investing offers a level of flexibility not commonly found in paper assets, allowing investors to choose their level of involvement. 

Active or Passive Investing Models

Active investing involves assuming the role of an asset manager responsible for acquisitions, dispositions, capital improvements, and operational oversight. This approach necessitates substantial time, experience, and expertise.

Many accredited investors maintain careers outside of real estate, lacking the requisite resources to excel in active management. For these individuals, passive investing offers a more viable path. Passive investors participate alongside other investors, leveraging the expertise of professional real estate asset managers, therefore minimizing their hands-on involvement. 

Exploring Real Estate Investment Options

Real estate investing offers diverse options to cater to various investment objectives, such as diversification, passive income generation, and long-term wealth creation. 

Beyond choosing between active and passive investment models, investors also face choices regarding property types.  

Understanding the Different Types of Real Estate Investments

Real estate can be broadly categorized into residential and commercial properties. Residential real estate encompasses single-family homes, duplexes, triplexes, and quads. 

In contrast, commercial real estate serves business or investment purposes and encompasses six distinct categories:

  • Multifamily
  • Office
  • Retail
  • Industrial
  • Hospitality/Hotel
  • Special Purpose
Residential Property (Single and Multifamily)

Residential real estate comprises properties with one to four units, while multifamily properties include those with five or more units. 

Multifamily real estate enjoys the advantage of qualifying for nonrecourse commercial lending. It provides investors with enhanced flexibility compared to traditional residential lending with its constraints, full recourse nature, and personal credit encumbrance. 

Although residential real estate investors can find success within their niche, multifamily properties offer distinct advantages, including economies of scale and professional property management. 

Commercial Properties

Commercial properties cater to various business and investment objectives. These property types include:

  • Office: Encompassing traditional office spaces, medical offices, creative and co-working spaces, executive suites, and flex spaces.
  • Retail: Spanning malls, strip malls, community centers, lifestyle centers, freestanding retail, and power centers. This category includes establishments such as drug stores and grocery stores. 
  • Industrial: Involving the manufacturing, processing, or storage of goods, including manufacturing centes, warehouses, cold storage facilities, truck terminals, and data centers.
  • Hospitality: Primarily comprised of hotels, motels, and resorts. 
  • Special Purpose: An eclectic category encompassing properties like churches, self storage units, gas stations, amusement parks, farms, museums, and theaters, among others. 
REITs (Real Estate Investment Trusts)

Real estate investment trusts (REITs) are often likened to real estate-flavored stock because they are investments focused on the real estate sector of the stock market. It’s important to note that investing in REITs introduces more stocks to your portfolio, rather than direct real estate assets. 

The distinction is vital since REITs historically exhibit higher correlations with the stock market, resulting in increased volatility. Furthermore, REITs do not offer the same tax advantages as direct real estate investments. 

Are There Any Drawbacks to Investing in Real Estate?

While real estate offers a host of benefits, it’s crucial to recognize that all investments come with inherent risks, although the degree of risk varies. 

As you construct your investment portfolio, it’s wise to consider the Sharpe Ratio, a measure of the risk-adjusted return that accounts for an investment’s return in relation to its risk. High Sharpe ratios indicate superior risk-adjusted returns, helping you identify assets that align with your financial goals. 

It’s noteworthy that direct real estate investments have consistently demonstrated superior risk-adjusted returns for over two decades when compared to stocks and bonds. This robust risk-adjusted return is yet another compelling advantage of investing in real estate. 

Initial Capital Requirements

One of the initial barriers faced by aspiring real estate investors is the capital required to initiate their ventures. Typically, residential real estate investments require a minimum of twenty percent down payment to avoid private mortgage insurance. This ensures an 80% loan-to-value ratio and the application of leverage.

Considering the current average U.S. home price of $410,200, a twenty percent down payment amounts to $82,040. For commercial properties, especially larger, multimillion-dollar assets, the capital demands are even more substantial. Historically, these capital constraints limited commercial real estate investments to affluent individuals and institutional investors.

However, fractional investing has emerged as a game-changer, enabling accredited investors to pool their resources and acquire significant, stable properties in the United States. These investors can participate in such opportunities with as little as $50,000 to $100,000.

Selecting the Right Locations

Real estate investment’s success is profoundly influenced by market dynamics. Investing in markets characterized by long-term population growth, ample job opportunities, and favorable landlord-tenant laws can spell the difference between success and disappointment.

A common pitfall involves focusing solely on discounted properties in proximity to one’s residence without adequately assessing the market’s overall quality. Neglecting market-centric risks can jeopardize investment returns.

At 37th Parallel Properties, we employ a meticulous approach, analyzing numerous metrics for major Metropolitan Statistical Areas (MSAs) in the U.S. We then select the top-performing markets to invest in.

Our investor base spans all fifty states and various countries, with passive limited partners benefiting from our professional services, regardless of their geographical proximity to the properties. Proximity to the investment location is no longer a requisite, as our investors access top-performing markets remotely.

Patience in Pursuit of Substantial Returns

When you invest in real estate, you have the potential to profit in four ways. There is the ongoing cash flow or yield you receive from operations. There are also the tax benefits that come with investing in real estate. Lastly, equity grows from paying down the mortgage and appreciation.

One of the benefits of real estate investing is the potential to make significant returns. But it might not feel that way in the beginning. 

If you own the property for years, the only return you’ll typically receive is ongoing cash flow from your rental income. The equity buildup only hits your bank account once the property sells. 

I’ve had calls from investors who need help understanding this. I’ve heard, “I got six percent from my real estate this year, but the stock market returned ten percent.”

That’s an apples-to-oranges comparison. The stock market reports a total return (dividends and equity growth), whereas real estate only reports the cash flow distribution and not the equity or property value growth. 

Later, after the property sells, those same investors receive the equity growth from their investment, and their overall return on investment soars. At that point, it becomes an apples-to-apples comparison, and the benefits become clear. 

How can we help?

Whether you’re an experienced investor or new to direct multifamily investing, we’re here to help.

We look forward to hearing from you.