Investors purchase real estate to generate attractive rates of return on capital, to hedge against inflation or to increase their income. They can invest in real estate directly through personal purchases or indirectly through real estate investment trusts and property holding companies. Investors can have short or long-term objectives when making an investment decision and will have varying goals that depend upon their reasons for acquiring real estate.
Some investors buy real estate and make small or major improvements to resell it at a profit. This process can include clearing or improving land, home renovation or seeking a zoning change on a property. Investors may make no improvements to real estate and simply speculate based on market conditions such as a housing bubble, or future value such as land investments that will increase in value over a decade due to population expansion, according to the California Public Employees’ Retirement System.
Real estate investors commonly purchase property with the intention of earning passive income through the collection of rents. They might start by financing a single property and using the rent money to pay off the mortgage. Some investors will use the equity in their holdings to buy additional properties until they have enough passive income to earn a living solely through rentals.
Real estate gives investors equity, or ownership interest, they can use as collateral for other investments. Lending institutions prefer that investors who take out loans have collateral they can seize in the event of default, according to San Jose State University. In favorable market conditions, the price appreciation of real estate can rapidly increase the net worth of an investor on paper, allowing him to borrow more money for additional investments.
Some investors purchase real estate to reduce their taxable income at the federal and state levels. Deprecation allows investors to write-off the purchase price and improvements made to real estate over a set period of years. This can help offset profits from other activities such as a job, rental income or stock market investments. In the United States, they can depreciate commercial real estate over 39 years and residential real estate over 27.5 years, according to the Internal Revenue Service.
- IRS.gov: Publication 527, Chapter 2
- California Public Employees’ Retirement System: Statement of Investment Policy for Agricultural Land Real Estate Program
- San Jose State University: Capital Leverage, Financial Intermediation
- U.S. Government Publishing Office. "17 CFR 1.55," Pages 107–108. Accessed July 6, 2020.
Chris Hamilton has been a writer since 2005, specializing in business and legal topics. He contributes to various websites and holds a Bachelor of Science in biology from Virginia Tech.