I’m a big fan of investing in the stock market; no secret there. But depending on where you live, real estate can make a great compliment to investing in the stock market, if you go about it the right away. Here are three advantages to real estate investing.

Property values increase over time.

There’s only a finite amount of land out there. So what happens when more and more people try to buy that same amount of property available on the market? Prices go up. While the growth rate may fluctuate year-by-year, over the long term it’s a pretty safe bet that your property will be worth more than it is now.

You make money by paying down the mortgage.

Another way an investment property can earn you money is that you make money by paying off the mortgage. And guess what the best way to do that is? Rent the place out!!

Renting out your property can easily cover most, if not all of your monthly expenses if you choose a property in a good location. The place needs to be somewhere people want to be. If that’s the case, you can often charge enough rent to cover your mortgage, utilities, taxes and maybe even condo fees.

Costs associated with the property are tax deductible.

Right, so all those expenses I mentioned up there? They’re all tax deductible. You have to claim any rental income on your annual tax return of course, but in many cases the expenses more than offset that. Here’s a more thorough list of everything you can deduct from a rental property:

• Home insurance
• Any advertising you pay for to find a renter
• Interest on your mortgage
• Property taxes
• Utilities, if you’re paying them
• Repair and maintenance costs

So let’s say you have a property and you’re charging $1,800 a month in rent. Your mortgage is around $1,600, taxes are $150, and condo fees are another $150. That’s $1,900 in monthly expenses – your tenant pays utilities, let’s say. Right off the bat, you’re only shelling out $100 a month. But you’re paying off about $1,000 worth of mortgage principle every month. See how powerful that is?

When tax time comes around, you’ll have to claim $21,600 in rental income. But you’ll also deduct about $8,400 in mortgage interest, $1,800 in property taxes, and another $1,800 in condo fees. That knocks the net amount down to $9,600. If you’re in a 40% tax bracket, you’ll pay $3,840 on that.

So where does that leave you for the year? Well, you paid off around $12,000 in principle, and your property maybe increased by 4% (that’d be $16,000 on a $400,000 property). That’s an increase of $28,000 in value, and you paid out $3,840 before repairs and maintenance. So you’re up just over $24,000, which on a $400,000 property would be a return of 6%.

Now, you could argue that you could do better than that in the stock market, and you’d be right. But let me ask you something: do you have $400,000 to invest in the stock market to pull in more than $24,000 in a year? If you do, good for you; many people don’t. And that’s the thing: yeah, you’re getting 6%, but you’re making that by putting someone else’s money (the bank’s) to work for you. THAT’S the power of real estate investing.

Wrapping it Up

Look, real estate investing isn’t for everyone. Managing tenants can be a pain in the you-know-what, and it does complicate your personal finance a fair bit. But for those who are willing to deal with that, investing in real estate can be a great way to grow your net worth.

You make money through increasing property values, by renting to tenants, and by offsetting taxes and expenses with deductions. Something to consider as we all work toward the grand dream of retirement!