You have probably heard that real estate is a good investment. You may even know some people who are active investors. You may even be thinking yourself that you should get into real estate investing (you should be). But have you ever thought about why real estate is such a good investment. My friends and fellow investors Richard Scarbrough, Jo Garner and I briefly went over the reasons why on the radio this past Saturday. Since we were constrained by time, I thought I would share some more detail. Be sure and read through for a bonus at the end of this post.
There are financial and non-financial reasons why real estate is a good investment. I’ll go through the top 5 financial reasons today and save the non-financial reasons for a future post.
- Cahsflow is KING in the real estate investing world. Cashflow is income from the property such as rent, less expenses including principal and interest payments, insurance, property taxes, 10% repair credit and 10% vacancy credit.* For example, if monthly rental income is $1,000 and your monthly expenses total $850, that leaves a monthly cash flow of $150 or profit per month.
Are you beginning to understand the beauty of real estate? All of your expenses are paid by your tenants. - Leverage – Leverage simply means having the ability to use other people’s money (OPM). Think about how you purchase real estate. You purchase it with a loan or mortgage. That is using OPM. You can even purchase real estate with no money out of your pocket, entirely using OPM! Even better, your first purchases will often utilize a low, fixed interest rate payable over thirty years. What other investments allow you to do this? What if you wanted to buy some gold coins (you should be doing that as well, but that is another post)? Would a bank lend you the money to buy gold? How about stocks or bonds? The answer in general is no. You would have to come up with 100% of the purchase price to buy any of those other investments. Leverage is a huge advantage for real estate investors.
- Monthly Mortgage Paydown – Owning real estate also allows you to build wealth every month. Every time you make your mortgage payment, some of that payment goes to interest and some goes to principal. The portion that goes to principal is just like putting money in the bank. Every month you owe a little bit less on the property and have little more equity on your balance sheet. Plus, remember who is paying it down for you, your tenants!
- Federal Tax Savings – We all know that Uncle Sam takes a chunk with income taxes while allowing fewer and fewer deductions.
Real estate investing is one of the few methods that can actually bring your earned income down to zero! Yes, zero so you pay little or no federal income taxes. Now, I’m not doing anything illegal and do not suggest you do either. However I do take every legal deduction available and there are many. One of the best is something called depreciation, but that’s another post for another day. Want to learn more about the tax benefits of real estate investing? I suggest reading this (Nolo’s Every Landlord’s Tax deduction Guide) book. (Please note that I am not a CPA or professional tax advisor. Please consult an appropriate expert before completing any investment decision.) - Appreciation and Equity – You may not think that this applies today with the recent real estate boom and bust. But part of the art of being a real estate investor is finding the good deals, deals where equity and appreciation are still available. They are out there. Find one and get instant equity when you close. Plus, we are pulling out of this recession and while real estate still has to hit bottom in some areas, it will eventually start to appreciate slowly once again.
There you have them, the top five financial reasons why you should invest in real estate. And here is the bonus I promised. With any other investment vehicle, such as stock, bonds or precious metals, you might get one, maybe two of these financial benefits. Owning real estate gives you all five. There is no other investment vehicle that gives you all of these benefits.
I’ll blog again soon about the non-financial reasons to invest in real estate. Until then, work smarter, not harder!
* As a general rule of thumb, always allow for a vacancy credit and a repair credit equal to 10% of the gross monthly income. If a property’s income is $1,000 for example, then the vacancy and repair credits would be $100 each.
