It’s one thing to earn a paycheck and save, but it’s another to start using your money to make investments and increase your wealth.
There are many different things you can choose to invest in, but real estate is one of the best. Throughout history, real estate ownership has been a driving force behind wealth, and that is unlikely to change any time soon.
As a property owner, you can earn income from renting out your property, as well as from the growth in value of your property. This can either happen through appreciation of your asset, or by you adding value to the property. Despite what you might hear from certain gurus or television shows, investing in real estate shouldn’t be looked at as a get rich quick scheme. That being said, it’s certainly one of the best, and most readily available investment opportunities for individuals.
One thing to understand about investing in property is that it isn’t solely about buying a property. You really should treat your investment like you would a business – you will ultimately become a business owner. That means that you have to take necessary precautions to protect yourself, and your business.
You’ll, most likely, be responsible for all the necessary repairs and improvements to the property if you’re renting the property out, or if you’re planning to fix it up before you sell it.
Now, another thing to understand is that if you do decide to do some of the repairs or improvements yourself, you want to make sure you do it right. This means that you need to make sure to get all required permits before you make the improvements, and of course, you should make sure to get the right type of insurance to cover your work in case anything happens. If you’re a landlord, it also means protecting yourself from potential lawsuits tenants, or other people visiting your property could bring against you.
For example, maybe you decide to do some work on the landscaping for your property, but make the mistake of leaving a rake out, and your tenant trips and falls and gets injured. Because they suffered serious injuries on your property, they could decide to sue you damages.
Those hospital bills could really eat through your savings, depending on how severe the injuries are. Situations like that are the very reason why you would want to find an insurance company that offers landscaping insurance. With proper insurance coverage, you wouldn’t have to come out of pocket to cover any damages, plus, it’s one of the major components of common area maintenance (CAM).
That’s just one of the risks that come with investing and being your own business owner. It’s also important, though, to understand that with great risk comes great reward. If you invest in the right property, your investment can prove to be an incredible success.
Below, we’ll run through some of the best reasons to invest in real estate.
One of the biggest benefits to investing in real estate is the potential for appreciation. While other items you buy, like cars, make may start to depreciate almost immediately, real estate tends to appreciate significantly over time. Now, it’s important to understand that appreciation rates are going to vary dramatically from market to market, but overall historically you can expect an average of around 3-5% in appreciation. That doesn’t sound like a lot on the surface until you take into account the value of the asset. The appreciation is going to be off of the asset value, but unless you bought the property with cash, your actual return on your cash investment would be much higher than that.
That leads us to our next point…
Leverage is when borrowed capital is used in order to increase a potential return on investment. In real estate, this is when you obtain a mortgage to reduce the amount of money needed to purchase a property.
In a typical scenario, a buyer might put up 20-40% of the property price in cash, and then obtain a mortgage to cover the other 60-80%. This allows you to purchase a $200,000 property with around $40,000 of your cash.
Now, in reality, investors have purchased properties with $0 of their own cash. The beauty of real estate investing, is that there are a million different ways you can go about it, for the purpose of this article, we’re talking about more traditional real estate investing models.
When you’re looking for potential investment opportunities, it’s just as important – if not more so – that you consider the potential to lose money alongside the potential to make money.
Property is considered a safe investment for a few reasons:
- They aren’t making more land & the population is increasing. Granted in an individual market, this might not necessarily be the case in terms of the population increase, but if you choose your market wisely it should hold true. This supports long term demand.
- Predictable income and expenses. If you’re planning to buy a rental property, before you ever buy the property, you should know within a fairly close range the expected rental rates, as well as your outgoing expenses. Now, sometimes things can happen that blows this up one way or the other, but in most cases you should be able to calculate your monthly income before you buy.
- You have control over your asset. Unlike investing in someone else’s business via the stock market, with real estate you own a real tangible asset. That means you maintain control. Assuming you’re smart, you can have a real impact on the success of your investment.
In addition to these factors, at least in the US, the government favors property owners. Since the US is a nation of homeowners, the laws in general are extremely favorable to property owners which adds additional protections, as well as this next benefit…
It turns out, owning property is going to open up a lot of doors for you when it comes to tax breaks. All those improvements and renovations you make on your property – those can be written off.
In addition to writing off all your expenses, you also will get to take depreciation for the building. If you’re wondering why you can claim depreciation, when your property is increasing in value, those are two different things. Someday when you sell your property – if you ever sell it, and if you don’t take advantage of a 1031 exchange – you’ll have to pay taxes on the profits (plus potentially depreciation recapture), but in the meantime you get to enjoy depreciation. The typical depreciation schedule lets you take the value of the building and write it off over 27.5 years. That means on a property with a building valued at $200,000, you’d be able to write off $7,272.72 each year.
You remember that leverage stuff we were talking about? Well, that’s another advantage. The IRS allows you to write off the interest you’re paying on your mortgage. That interest expense serves as a deduction against your rental income.
Many of the most successful real estate investors utilize all these tax deductions, plus the more complex structures like 1031 exchanges, trusts, and so on to really make their investments pay off like few others can.
While stocks, and other traditional investments, can serve as great assets, in many cases they can go up and down in huge increments together. You might be invested in 2 completely different companies, but a world event could send the entire stock market tanking. It might have nothing to do with those companies, but rather some external factor that is spreading fear and causing people to sell. While in general having liquid investments like stocks is great, sometimes these sorts of events can wreak havoc on a portfolio. Real estate, on the other hand, tends to be more stable as it isn’t as liquid. It’s much more unrealistic for someone to panic, and in turn sell their house. They are still going to need a place to live, so then what did that really accomplish? Now, real estate is not immune to huge market drops, just look at the last major housing bubble collapse in 2008, however, that being said, it’s not as frequent, and the drops tend not to happen overnight.
You never want to put all your eggs in one basket, and that includes real estate. If you do invest in real estate, make sure you have other assets to keep your portfolio diversified.