Why Savvy Investors Prefer Investing in Real Estate Over Equities If you're looking for a less risky and more long-term investment to make you real money, you may want to consider real estate. Here's why.
By Ari Chazanas Edited by Kara McIntyre
Opinions expressed by Entrepreneur contributors are their own.
There are many reasons why real estate has been considered an excellent long-term investment. It's an opportunity that brings tax advantages and higher returns on your money. If you're looking for a tangible asset that can help build wealth over time, you would do well to make real estate a priority in your investment portfolio.
Here are some of the benefits of putting your hard-earned money into real estate and why this is a preferred investment over equities for investors who want to lower their risks and increase their rewards.
Related: 10 Reasons Why Every Entrepreneur Should Invest in Real Estate
Long-term investment opportunity
Real estate investments are not ideal for those who like to move their money around at a moment's notice. For those investors, there is a multitude of other investment options such as stocks, precious metals and, of course, crypto. If you're in the market to sell, chances are someone else is in the market to buy that asset.
Real estate doesn't afford that option. If you've ever tried to sell a home, you're well aware of all the steps it takes to find a buyer much less proceed with the transaction. You're looking at weeks, maybe even months, dealing with market fluctuations and, if you're lucky to sell at the right time, pocket some type of profit. Maybe that profit is worth all the hassle, maybe it's not — that's if you actually make money on the deal and don't come out of it taking a loss.
Investing in real estate should only be considered by individuals who can put aside a large amount of money without the need to tap into that resource anytime soon. In the meantime, the value of that property continues to appreciate and the longer you hold on to it, the more it grows.
Related: How to Start Investing in Rental Properties — Your Step-by-Step Guide
Tax advantages
An investment property also provides ample opportunity for helping you keep more money in your own pocket instead of handing it over to Uncle Sam come tax time. As a tax shelter, real estate is one of the best options around for a variety of reasons.
Consider what makes a tax shelter such an attractive method for lowering your income tax bill, it helps to reduce your liability by legal means. In the case of real estate ownership, your investment property can be a rather reliable tax shelter because the tax code permits investors to reduce their taxes through deductions like yearly property taxes and interest paid on a mortgage.
The value of the property typically increases from year to year and the income you receive when you eventually sell that property could be a tax-free windfall. The capital gains exemption allows you to exempt up to $500,000 of the value in your home that has since appreciated from being affected by a capital gains tax liability.
Of course, not all properties will qualify since there are strict rules and regulations in place to enjoy the benefits of the exemption. But don't get too frustrated if your property fails to qualify, the rates on income tax are often a whole lot higher than the rates on a capital gains tax. At the time of a sale, if you're an investor who has owned the property in question for more than 12 months, the IRS could tax your capital gains at a rate as low as 0% to as much as 20% based on your income bracket.
Refinancing as a way to reduce your tax liability
It's called a cash-out refinance and it can be another effective method for avoiding the capital gains tax altogether. The way it works is simple — you turn the increased equity in the property into cold hard cash by replacing your current mortgage with a brand new loan, one at a higher amount than the old one. You get to keep the difference without the tax bill on that income.
How does that work? The IRS allows you to convert your equity into cash because it doesn't consider any proceeds gained from a cash-out refinance as income. So you don't have to sell your property at a profit and find yourself subject to a considerable capital gains tax. You can take out a new loan, use the money to pay off an existing mortgage and take the remainder without paying any taxes on it. The tax code allows you to turn the equity in an investment property into cash and dodge a capital gains tax.
Related: 5 Amazing Tips on Turning Real Estate Into a Real Fortune
Wealth building opportunities make real estate your best investment
Owning real estate, particularly investment property, already offers you the benefit of bringing in passive income on a steady and predictable basis of cash flow while diversifying your investment portfolio. Those are just two reasons why real estate is such an attractive investment. But it's all of the opportunities for building wealth while minimizing the amount you pay in taxes on that value that make real estate the preferred choice over equities when making the best decision for putting your money to work over the long run.
The stock market is right for some people and it can be a lucrative way to generate long-term wealth but not everyone has the stomach for it. The risk-averse can find other avenues for financial success and real estate remains a far more stable and far less volatile alternative. The returns may typically be more robust on stocks but real estate remains a reliable way to make money in today's economy.
