When thinking about investing, real estate should be considered a viable option. With strategic guidance and savvy planning, you can turn real estate into valuable investment potential.
There are several reasons to invest in real estate: income potential, tax reduction, and adding to a savings/investment portfolio. It is important to note that real estate investments can be risky and a bit trickier than simply investing in the stock market. However, almost any kind of investment, whether in stocks or real estate, will incur some level of risk. What matters is being a well-informed investor!
There are two ways to look at real estate investing: monthly cash flow and/or appreciation. When the two meet, all the better!
Investing for cash flow means that the rent you are earning from your tenants is above the mortgage on the property (assuming you took out a mortgage to purchase it). The greater the difference between your mortgage payment and the rental rates, the bigger your cash flow.
Investing for appreciation can take more time and could be trickier. You want to buy low and sell high, and to do that you might have to be willing to wait for your property to sufficiently appreciate in value.
If you purchase a property with good, steady cash flow which you can own for a relatively short time and then sell for a good profit because it has sufficiently appreciated in value, it’s a win-win.
Passive Income
The income you receive from an investment property is referred to as Passive Income (this is your cash flow) and it will be taxed at a lower rate that your regular income. This gives you a tax savings! If you’re into negative cash flow - your expenses on the property are greater than the income it’s generating - that, too, is a tax deduction as a loss.
Taxes
You can’t escape paying taxes, so you might as well be smart about it! As explained with Passive Income, a saving in taxes can be another advantage with an investment property. Deductions on investment properties can make a long list, including operations costs such as utilities, maintenance, repairs, and so on. (Your financial advisor can advise you on deductions.) You can even deduct the costs incurred to purchase the property.
Other potential deductions can include, depreciation of the property, interest on loan payments, and insurance premiums. Basically, all of the expenses you have can be used toward deductions.
The advantages of the tax deductions can be significant savings, even with just one investment property!
Leverage
The ability to leverage funding from others is a possible advantage to investment real estate, and it’s often one that is under-valued by potential investors. You don’t necessarily have to pay cash for your investment property! Rather than utilizing your 100% of your own cash to purchase a property, you opt to use part of your cash and bring in others to leverage their funding toward the purchase. One example, is leveraging through a mortgage lender. The clear advantage is that you are then able to use your remaining available cash toward another real estate investment!
For example, you purchase one house by only putting down 10% and use a mortgage lender’s money at 5% interest for the rest of it, but you are returning an 18% profit from the tenants’ rental payments. You’re in the positive, and you’ve leveraged well from a borrower!
Equity
You can achieve equity in a property in several ways. The difference between the property’s value and what you owe on it is considered the equity. If you get lucky, you get to purchase a property at a lower price than it’s actually worth. This means it already has equity. More often, however, you need to wait to build equity on a home or property! As you pay down your mortgage, you are gaining equity and even more so if the home’s value is appreciating as well! Keep in mind, though, that as a property appreciates in value, the rent values increase as well. This means that it’s likely you could command higher rents!
It’s not uncommon for investors to set to set an equity goal, and once they reach that goal they sell.
The advantages of real estate as investment are significant enough that real estate should be considered. While not usually an overnight, get-rich-quick scheme, it can be a way to build wealth and cash flow.
