Stocks mainly pay when they appreciate and bonds via coupons, but real estate offers five profit centers, such as income, tax savings and principal paydown.
NEW YORK – If you invest in stocks or bonds, you may be more accustomed to one way of getting paid. For stocks, typically you’ll only get paid from stock price appreciation. For bonds, you’ll typically only get paid from the coupon payments (similar to net rental income of rental properties).
Since 2000, government bond yields have averaged 2-4%, while corporate bonds have averaged 4-6%. Bonds can also appreciate and depreciate in price if the investor sells before maturity.
In comparison, let’s take a look at the five profit centers in real estate investing and how they can impact your long-term investment strategy:
- Net rental income: This is the money you make after all expenses (mortgage, insurance, property management fees) are deducted from your monthly rental income.
- Tax savings: When you invest in real estate, you can take advantage of numerous tax deductions and write-offs. This can help you save a lot of money come tax time!
- Principal paydown: Every month, a portion of your mortgage payment goes towards paying down your balance, paid by your renter. This is a great way to build equity in your property and reduce your overall mortgage balance.
- Home price appreciation: Over time, the value of your property is likely to increase. This can provide you with a nice return on investment when you refinance or sell the property. Out of all of the profit centers, home price appreciation will have the greatest impact on return on investment over a full market cycle (10-20 years.)
- Inflation hedging: When inflation goes up, the prices of goods and services also increase. But since your mortgage payments remain the same, your purchasing power actually goes up! This makes real estate a great hedge against inflationary pressures.
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