The benefits of real estate investment are numerous and multifaceted. With considerable investment, one can earn excellent returns, tax advantages, predictable cash flow, and much-added benefits. Also, it’s a great source of building wealth. If you are thinking about investing in real estate? Here's what you need to know about real estate investment in Pakistan and why a property is considered a good investment.
Salient Takeaways
- In real estate investment money is made through rental income, appreciation, and profits generated by business activities that depend on the property.
- The benefits of investing in real property include passive income, stable cash flow, tax advantages, diversification, and leverage.
- Real estate investment trusts (REITs) guide you on the way to invest in real estate without having to own, operate, or finance properties.
Build Equity and Wealth
As you pay down a property mortgage, you build equity which means an asset that's part of your net worth. And as you build equity, you have the leverage to buy more properties and increase cash flow and wealth even more.
Cash Flow
Cash flow means the net income from a real estate investment after mortgage payments and operating expenses have been made. A primary benefit of real estate investing is its ability to generate cash flow. In many cases, cash flow only strengthens over time as you pay down your mortgage and build up your equity.
Deductions and Tax Breaks
Real estate investors can avail advantage of numerous tax breaks and deductions that can save money at tax time. In generic terms, you can deduct the reasonable costs of operating to buy real estate property in Pakistan.
You can depreciate the cost of buildings but not the land And since the cost of buying and owning, an investment property can be depreciated over its useful life), you benefit from decades of deductions that help lower your taxed income.
Portfolio Diversification
Another benefit of investing in real estate is its diversification potential. Real estate has a low and, in some cases, negative correlation with other major asset classes. This means the addition of real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk. Therefore there are many real estate problems and challenges in Pakistan.
Appreciation
Real estate investors make money through various means like rental income, any profits generated by property-dependent business activity, and appreciation. Property values likely increase over time, and with a good investment, you can turn a profit when it's time to sell. Rents also tend to rise over time, which can lead to higher cash flow.
Real Estate Leverage
Leverage is the use of various financial instruments or borrowed capital (e.g., debt) to increase real estate investment opportunities in Pakistan. A 20% down payment on a mortgage, for example, gets you 100% of the house you want to buy that's leverage. Because real estate is a tangible asset and one that can serve as collateral, financing is readily available.
Competitive Risk-Adjusted Returns
Real estate returns vary, depending on factors such as location, asset class, and management. Still, a number that many investors aim for is to beat the average—what many people refer to when they say, "the market." The average annual return over the past 50 years is about 11%.
Real Estate Investment Trusts (REITs)
If you want to invest in real estate, but aren't ready to make the jump into owning and managing properties, you may want to consider a real estate investment trust (REIT). You can buy and sell publicly-traded REITs on major stock exchanges. Many trades under high volume, meaning you can get into and out of a position quickly. REITs must pay out 90% of their income to investors, so they typically offer higher dividends than many stocks.
Inflation Hedge
The inflation hedging capability stems from the positive relationship between GDP growth and the demand for Property. As economies expand, the demand for real estate drives rents higher. This, in turn, translates into higher capital values. Therefore, Property tends to maintain the buying power of capital by passing some of the inflationary pressure on tenants and by incorporating some of the inflationary pressure in the form of capital appreciation.
The Bottom Line
Despite all the benefits of investing in real estate, nevertheless, there are drawbacks. One of the main ones is the lack of liquidity (or the relative difficulty in converting an asset into cash and cash into an asset). Unlike a stock or bond transaction, which can be completed in seconds, a Property transaction can take months to close. Even with the help of a broker, it can take a few weeks of work just to find the right counterparty.
Still, real estate is a distinct asset class that's simple to understand and can enhance the risk-and-return profile of an investor's portfolio. On its own, immovable offers cash flow, tax breaks, equity building, competitive risk-adjusted returns, and a hedge against inflation. Real estate can also enhance a portfolio by lowering volatility through diversification, whether you invest in physical properties or REITs.In view of the above fact-based discussion, real estate investment is a highly profitable and secure market.
