Real estate is a rare investment vehicle. It provides people with a place to live while working as an investment. What’s more, this investment offers a very powerful wealth building combination of returns.
APPRECIATION: Over the past 80 years, real estate values have continually increased. There have, of course, been some periods where values decreased, but the overall trend has always gone up. Like anything else, the value of real estate is determined by supply and demand.
So what are the factors that keep real estate in such high demand over the years? One of the main reasons is that shelter is a basic human need. People need a place to live, work, and shop where they are protected from the weather. Additionally, real estate is an investment that benefits from inflation. In periods of high inflation, real estate values go up.
LEVERAGE: One of the biggest advantages of real estate as an investment over any other asset class such as stocks, mutual funds, commodities, and government financial instruments is leverage. Leverage allows you to purchase and control a large amount of real estate for a relatively small amount of money.
For example, you could easily purchase a $100,000 property with only a 20% ($20,000) down payment. In some cases you can buy property for as little as 10% or less of the purchase price giving you even more leverage. To illustrate the power of this, consider this example:
Let’s say you bought $20,000 worth of gold, stocks, or some other investment. Then over the course of the year your investment went up 10%. Your investment is now worth $22,000, and your total return on investment (ROI) is 10%. Not bad.
Now let’s take that same $20,000 and use it as a down payment on an income property and buy a $100,000 house. Once again, let’s say it goes up 10% for the year. Your property is now worth $120,000, and your $20,000 investment has now doubled due to the $20,000 increase in your properties value. You have now made a return on investment of 100%! (This increase does not even consider the equity build-up resulting from the decreasing mortgage principal, cash flow, or tax advantages!)
FINANCING: Unlike other investments such as stock, bonds, mutual funds and commodities, you can get financing for the purchase of real estate. Lenders will loan up to 80% of the market value of your property, and in some cases as much as 90%. Up until a few years ago, lenders were even lending over 100% of the value, thereby giving you 100% leverage and an infinite return on investment.
Some of you may be saying that you can finance the purchase of stock, however, with purchasing stock on margin is not the same. You are typically limited to 50% of the principal you start with and if the value goes down you may have to pay those funds back with a broker’s margin call.
TAX ADVANTAGES: With investment property, you are allowed to deduct, as an expense, all of the mortgage interest, property taxes, insurance, maintenance, repairs, inspections, professional fees, and depreciation.
Do not confuse this deduction with that of your personal residence where you can deduct the mortgage interest on up to two properties. With investment property you are allowed to deduct these expenses on an unlimited number of income properties.
Depreciation is a tremendous deduction that is often misunderstood and underappreciated. This is a “paper” deduction, which means that you do NOT need to spend any of your own cash in order to get this deduction. The IRS simply allows you to depreciate the structure (not the land) as if it would be worth nothing at the end of 27.5 years! Of course we all know that the property will be worth much more than what you paid for it in 27.5 years. Nevertheless, on a $100,000 house (assuming, for example sake, the structure is worth 80% of the total value) we are allowed to write off nearly $2,910 in depreciation alone each year!
CASH FLOW: A properly purchased income property will provide its owner (you) a positive cash flow each month and year. Cash flow will vary from property to property and can be affected by many variables such as the size of your down payment, the purchase price, market rent, expenses, etc. However, if you buy a property that makes sense the day you buy it, by following some simple yet prudent guidelines such as those followed by Norada Real Estate Investments, you should have a solid investment right from the beginning and for many years to come.
Typically, it is wise to purchase property with a positive or neutral cash flow. There are only a few exceptions to this rule when carrying a (slightly) negative cash flow would make sense. Otherwise, we do not recommend purchasing property with significant cash flows.
The most common reason for purchasing a property with a (slightly) negative cash flow would be in situations where you are “deferring” a portion of your down payment in lieu of the negative cash flow. For example, let’s say that a property purchased with 20% down would provide you a decent cash flow. However, you decide to increase the leverage on your investment by purchasing with a smaller 10% down payment thereby keeping the other 10% of the down payment. You have lowered your down payment and doubled your leverage. In a roundabout way, you are paying the “deferred” down payment on a monthly basis — similar to a payment plan.
YOUR TENANT PAYS YOUR MORTGAGE: A unique and very attractive feature of owning income property is that your tenants literary buy your investment property for you. Your tenants pay you rent every month that you then use to pay down your mortgage. When you invest in stocks, bonds, or precious metals, you are the one paying for it all.
SOLID ASSET: Real estate is widely recognized as one of the greatest assets to own. It makes for solid collateral, shows strength on balance sheets, and can be financed easier than most other assets. It is no surprise that most millionaires created their fortunes in real estate, or hold their wealth in real estate.
FREEDOM: Real estate requires a very small commitment of time. There is some management and record keeping each month but that is small compared to some other investments like buying a small business which can turn you into an employee at times. You do not need to follow it on a daily basis like stocks. And real estate investing can be done with very little interference with your current job.
You can clearly see why so many people choose to invest in real estate and why the wealthiest people have become wealthy with it. There are very few, if any, investments that can provide you with all the benefits that real estate can. It is truly one of the best investment vehicles available to you today.
As the saying goes, “Don’t wait to invest in real estate, invest in real estate and wait.”
