What makes a real estate investment good?
This is a question I get asked all the time. Whether someone is buying their first rental property or scaling into a larger asset, they want to know what to look for. What actually makes one property a better investment than another?
The truth is, there’s no one-size-fits-all answer. But there are some key things I always suggest investors consider when evaluating a deal. These are foundational parts of what makes a real estate investment solid, sustainable, and profitable over time.
Here are six things to keep in mind as you evaluate your next opportunity:
1. Leverage
Leverage is one of the biggest reasons real estate stands out as an investment. The debt you can place on a property has a major impact on your overall return. That’s because you’re using borrowed money to control a much larger asset. And, ideally, your tenants are the ones paying that debt down over time.
Now, the kind of financing you can get depends on the asset class. Some properties qualify for very favorable loan terms.
For example, a self-storage facility or hotel may qualify for SBA financing. Larger multifamily properties over $2 million may be eligible for Fannie Mae or Freddie Mac loan. These government-backed loans typically come with lower interest rates because of the added security.
The better your loan terms, the better your return. So before you make an offer, evaluate the financing options available for that specific property.
2. Future Appreciation
Real estate has long been considered a hedge against inflation.
Over time, most properties increase in value, especially in growing markets. That appreciation allows you to build equity without having to do much besides hold the asset. In an inflationary environment, this becomes even more important. Your dollars may be worth less over time, but your property values (and rents) often go up.
Not every market performs the same, of course. But real estate tends to appreciate in line with the economy, or sometimes faster. When you invest in areas with strong fundamentals, you’re putting yourself in a position to benefit from that future growth.
3. Passive Income
Cash flow matters. You want your property to generate income each month, not drain your reserves.
I’ve worked with some investors who were more focused on long-term appreciation than immediate cash flow. That might work for some advanced strategies, but in general I wouldn’t recommend buying something that doesn’t produce solid positive cash flow from the state.
Repairs and improvements over time will eat into that income. A new roof, a boiler replacement, and an unexpected plumbing issue can add up quickly. If you’re only breaking even on cash flow, one big repair can put you in the red. Make sure your underwriting accounts for maintenance, reserves, and future capital expenses. Positive cash flow helps to keep your investment stable, even when surprises pop up.
4. Tax Benefits
This is one of my favorite parts of real estate.
Tax benefits can make a huge difference in your personal bottom line. Unlike earned income, rental income isn’t typically subject to Social Security or Medicare taxes. That saves you a decent amount right off the top.
But the bigger benefit comes from depreciation.
Depreciation is a non-cash expense that reduces your taxable income. In many cases, it shelters most (or all) of the rental income you receive. That means you’re collecting cash flow while reporting little or no taxable income from the property.
And when it comes time to sell, capital gains tax rates are usually lower than your regular income tax rate, meaning you keep more of the profit. If you’re investing for the long term, these tax advantages can quickly add up.
5. Ability to Add Value
One of the things I love most about real estate is how much control you have. If you invest in the stock market, you’re pretty much at the mercy of whatever the market is doing. You can’t call the CEO of the company you invested in and suggest improvements – you just have to wait and see what happens.
With real estate, your actions can make a big impact on your returns. You can increase the income and value of the property by making improvements, cutting expenses, or improving management. That control allows you to influence your return in ways that just aren’t possible with other types of investments.
You’re not just a passive participant. You’re actively creating value, and that’s powerful.
6. Lower Risk Exposure
This depends on what type of real estate you’re buying. Not all investments are created equal when it comes to risk. For example, a stabilized multifamily property typically carries much less risk than a large office building.
But if you choose your asset wisely, real estate can offer much lower risk exposure than you may expect.
If the economy takes a downturn, properties with strong fundamentals – especially things like subsidized housing – tend to hold their value and stay occupied. The key is knowing how to evaluate risk and being thoughtful about where and in what you invest.
Conclusion
So what makes a real estate investment good? It’s not just about the price or location, although those things certainly matter. You should also pay attention to how the property looks in terms of leverage, appreciation potential, passive income opportunity, tax benefits, ability to add value, and risk exposure.
If you want help evaluating opportunities in Pennsylvania or Maryland, reach out to our expert advisors. We’re happy to set up a consultation.
