The Benefits of Investing in Real Estate Have Never Been Greater
Posted: Friday, July 03, 2009
by Mark Thompson
Equity Team
There are numerous benefits when you invest in real estate. Most of them fall under the umbrella of "creating financial security", but there are others as well, which we will discuss in other articles. But first, let's clear up a common misconception. Some people wonder if real estate is still a good investment. The answer is "absolutely, yes". The market fluctuations of the last few years haven't really changed any of the fundamentals of real estate. In fact, home prices rose very quickly from 2001-2006 making many normal people millionaires. True, many folks also saw their equity erode when the market cooled off significantly, but these were not serious investors, these were speculators who didn't have a well thought out plan and who were looking for short term cash without "creating any value" or contributing to the economy in any way with their real estate investments.
Ability to return large piles of "short term" cash: It is said in real estate that you make your money when you buy, not when you sell. There are so many "bargains" on the market today, that a person can literally buy equity in real estate for pennies on the dollar. Buying residential properties, fixing them up, and then reselling them can return profits in the 30-40% range. This is a short term strategy with some income tax ramifications, but thousands of investors "fix and flip" properties all over the U.S every day for a nice chunk of profit.
Alternatively, the primary longer term benefit is property appreciation. Not only can you buy houses well below market value for "instant equity", but you can also anticipate that by holding the property for five to seven years or longer, that the value of the property will grow, this is simple appreciation. Home values on average rise about 9% per year. Therefore, the more property you buy and hold, the bigger the pot when it comes time to cash out or "trade up" to bigger properties.
Leverage: People rarely buy real estate entirely with only their own money. Real estate is one of the very few investments where you can easily control hundreds of thousands of dollars worth of property with virtually no money of your own "in the mix". And when little to none of your own cash is on the line, you are in great position. Loans are available of course for nearly any type of property so you get to leverage the buying power of someone else's money which you will grow over time because of appreciation. Yes you pay interest for this, but when you buy properly, the property appreciation should handily outpace the interest rate you are paying. In most cases, the interest on the loan is paid by the tenants in the property (if a rental) so the interest is really a non-issue. By taking out loans to finance your investment properties, you will use other people's money to make you money.
Tax Benefits: The income tax benefits are enormous. The Federal Government has an interest in as many people as possible becoming homeowners and real estate investors. The list of tax benefits is huge, starting with the ability to deduct all of the interest paid on your personal residence, but the benefits don't stop there. For second or third residences, there are personal tax benefits. And for Real estate investors in general, there are dozens of perfectly legal and "expected" tax breaks to help you pay less income taxes overall. When it comes time to sell property and "cash out" there are also ways to shield the some or all of the profits from taxation.
Passive income: When you buy rental properties the right way, you can achieve consistent stable cash each and every month that goes straight into your pocket! Having stable renters is the key to this, but this isn't difficult because the vast majority of renters ARE stable and consistent with the rent payments. You could pick a family at random who are looking to rent a home and the odds are good that this person will be relatively stable and pay their rent on the first of the month, every month. You pass a portion along to the bank for the mortgage payment, and the difference is yours to keep.
Bear in mind that not every property will produce all of these benefits. If you "fix and flip" a house or apartment building for a short term gain, obviously it won't still be in your portfolio to bring in long term passive income. So it is important to consider your personal goals when selecting properties. You will want to have a plan and an "exit strategy", and then go find investment properties that match your plan.
Smart real estate investors rely on the services of experienced professionals to find them the best investment properties that match their wealth-building goals. Finding the best properties can be time consuming, so the best use of your time is to rely on someone to whittle down the list of investment property options to just a few solid choices. The Equity Team is available for any new or experienced investor who is looking for the best deals on the market all across the country. If you would like to see a sampling of bargain prices rental properties just waiting for you to take ownership and begin building financial security, contact the Equity Team to get started today.
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