In terms of market shift, depreciations, and recessions, real estate is a pretty solid investment.
That’s because it’s almost foolproof. Unlike mutual funds or stocks, real estate doesn’t have any broker expenses or fees. Sure, you have to pay insurance on it, as well as mortgage payments, but that’s where your tenants come in.
Real estate is a reliable investment vehicle because people always need somewhere to live. It’s a consistent need, no matter your phase in life. Unlike other investment types, real estate rarely depreciates, not that it even matters. Plus, if you play your cards right, you can pay off the mortgage on a property, pay off all its insurance, and still make a profit when you rent to tenants.
But one thing that really sets real estate apart as an investment is depreciation. You see, even when real estate depreciates in value, it still benefits the owner.
The value of your home or property depreciates over time. Over the years, the hardware in your home (appliances, plumbing, water heaters, etc.) get older and lose some of their value. However, the land itself does not depreciate in value because it generally does not change.
However, as your property depreciates in value so do the taxes you pay on it. According to Thomas Black at Forbes Magazine, even if your home is appreciating in value as you continue to rent it out to tenants, as a physical property it is still technically depreciating as a taxable property.
Appreciation vs. Depreciation
That can be confusing to follow, so I’ll break it down like this:
The longer you own your home, the more it depreciates in terms of the taxes you pay on it. Because your home is getting older, you can use a depreciation allowance to reduce the taxes you pay on it.
At the same time, your property as an investment appreciates in value because you can still charge tenants rent for it.
This set up is completely unique to real estate. No other investment acts like this. That’s what makes real estate such a solid investment.
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