Beating the Market: Passive Income & Asset Appreciation
Owning Missouri real estate and using properties as passive income rentals has typically produced good returns for investors. Investing in real estate is excellent for portfolio diversification, and as time passes, asset appreciation increases the benefits of turnkey property ownership.
The real estate market goes through its ups and downs; this is no secret. So, is passive income and asset appreciation through real estate ownership enough to beat the market and hold fast to a healthy investment portfolio?
Some people argue that investing in stocks or other types of investments is better to earn passive income. However, the facts would suggest that real estate is the more lucrative choice.
Real Estate vs. Stocks as Passive Income
Consider real estate versus another popular investment strategy一stocks. While it’s feasible to calculate returns from every person who invests in stocks, there’s no way to accurately gauge returns from individual investment property on a broad scale. Historical data on total returns from individual properties is difficult to find. There are too many variables.
Real Estate Investment
That said, we can investigate how real estate investment trusts have performed through the years. Over time, interest rate fluctuations and their effects tend to balance out. When passive rental income, price appreciation, and inherent tax benefits of real estate investment are combined, real estate investments have significant potential for passive income success.
It should be noted that stocks generally increase in value more quickly than real estate does. Real estate prices tend to stay ahead of inflation rates, but not by much. When adjusting for home size and accounting for inflation, the average home value increases by 1.5% annually. Meanwhile, stocks have produced roughly a 7% return each year after factoring in inflation over long periods.
Why Real Estate as an Investment Still Beats Stocks
The bottom line is that when used as a long-term investment strategy, real estate has a much stronger return potential. It’s not a way to make a quick buck, but it can yield promising results over time. This is mainly due to three reasons:
- Rentals as passive income
- Tax advantages
Although it would be ideal to rely on increasing property values over time (asset appreciation) as the sole source of returns on that investment, it’s more likely that the significant returns will be the rental income collected from turnkey rental properties in Kansas City.
It’s not wise to invest in stocks with borrowed money; however, the opposite is true with real estate. You can use significant amounts of borrowed money when investing in real estate without adding a high amount of risk.
Lenders generally finance properties with down payments of a fraction of the total sale price, especially if you are investing in a primary home.
The small returns of property ownership can significantly amplify when money is borrowed for investment. For example, if you purchase a property for $100,000 cash and its value increases by 4%, you’ve now earned $4,000 on your initial investment.
Alternatively, if you purchase a $500,000 property by investing $100,000 of your own money and borrowing the rest, and the property value increases by 4%, you’ll have a return of $20,000 (20%) of your initial $100,000 investment.
Rentals as Passive Income
The best way to yield strong returns and beat the market is with passive income property rentals. As inflation increases over the years, you, as the owner of turnkey properties, can increase the rent to stay ahead of inflation year after year. This all but neutralizes the effects that inflation can have.
In addition, when you rent out properties to tenants for passive income, your property value will increase through the years. As long as you use a fixed-rate mortgage loan, your payments will not increase, even as the price of everything else does, along with inflation.
There are many tax benefits that real estate investors enjoy. To illustrate, when an investor purchases a property, they can write off the purchase price over a certain period of time. This tax deduction is known as “depreciation.” Real estate investment trusts, or REITs, also can reap an extra tax benefit: They can avoid corporate taxes by paying out a majority of their income as dividends. It’s relatively easy for investors to buy into tax-advantaged retirement accounts or an IRA. This would allow them to avoid dividend and capital gains taxes altogether.
The Bottom Line
When you consider rental income potential, tax benefits, and the leverage of appreciation, it becomes clear that investing in real estate and garnering the benefits of asset appreciation is a reliable way to beat the market.
If you’re interested in finding turnkey properties in Kansas City or learning more about the possibilities of passive income real estate, give Real Deal Properties a call today.