I’m a huge proponent of real estate investing, and you should be one, too! Why? Real estate investment has long been a cornerstone of financial success, with approximately 90% of millionaires attributing their wealth in part to real estate holdings. I bought my first rental property when I was 26 years old. The property was a 600-square-foot, one-bedroom, one-bath half-duplex located in Denver. Isn’t she cute?
Here is an overview of the deal:
I purchased the duplex in 2008 for $130,000. I made a downpayment of $10,121. My mortgage payment was $812.00 (principal, interest, taxes, and insurance). The renovation cost was $23,468. I initially rented the property for $950 and increased the rent to $1,250 in the coming years. I sold the property in 2014 for $222,500. It’s good for my first investment deal!
Here are some of the benefits of investing in real estate:
1.Everyone needs food, water, and SHELTER. The first benefit of real estate investing is the built-in demand. Everybody needs a place to live. Focus on owning real estate where people need to live, and you will never have an issue keeping your units occupied with great renters. Owning a tangible asset is a great way to hedge against economic and stock market fluctuations.
2. You can utilize leverage. Leverage is the use of debt (borrowed funds) to amplify returns on an investment. Let’s consider leverage when it comes to real estate vs stocks. If you have $10,000 in the stock market, it will buy $10,000 in stock and give you $10,000 in stock assets. If you received a 10% return that year on those stocks, it would be $1,000. However, leverage in real estate allows you to take the same $10,000 amount and purchase a $100,000+ property. The 10% return is not on the $10,000 you put in but on the $100,000 property. So, your return is $10,000. It’s a 100% cash-on-cash return. See my first investment property deal above!
3. Increases cash flow. Each property you invest in provides you with an alternate income stream. When you buy and hold a property, your tenant pays for your asset. Ideally, they pay your mortgage and then put some money in your pocket monthly. You collect rent from them, and your asset increases in value yearly. Plus, you can lock in a 30-year fixed-rate mortgage, so your payment will stay the same year after year. But you can raise rents yearly, so your cash flow will improve. Using an amortization calculator, you can estimate your mortgage payment.
4. You will realize natural appreciation. The most significant money made in real estate is through appreciation. If cash flow is one of the short-term benefits of real estate investing, appreciation is the long game, otherwise known as the icing on the cake. Appreciation is the increase in the value of an asset over time. According to Zillow, home prices have appreciated nationally at an average annual rate between 3 and 5 percent.
Let’s stick with the example of purchasing one $100,000 property. The appreciation of that property at just 5% would be $5,000. If you took out a loan (let’s say a 30-year loan at 8% interest), the equity buy-down would be about $800. Your total equity at the end of the year would be the $5,000 appreciation plus the equity buy-down of $800. You would now have a total increase in the value of your property of $5,800. Imagine what that could look like if you invested in five or ten properties!
5. You can force appreciation. You can force a house’s appreciation by renovating it or adding value (landscaping, painting, etc.). Renovations will increase the home’s value and make it more appealing to renters and buyers. New flooring and paint will go a long way!
6. You will receive tax benefits. There are several tax benefits of investing in real estate. Firstly, you can deduct 1/27th of the value of your properties (not including the land.) You can also deduct any interest or expenses you’re paying on any home loans.
One of the most significant tax benefits of investing in real estate is becoming classified as a full-time real estate professional. It says that if you spend 750 hours a year on your real estate investments and own your real estate business, you can receive the full benefit of your tax exemptions.
The IRS limits your deductions to $25,000 annually if you still need to get the full-time real estate professional designation. You can only receive deductions with this designation if you have at least $150,000 of taxable income. Be sure to consult with a tax professional before investing in real estate.
7. You can protect your asset. One of the unique benefits of real estate investing is its ability to insure against losses or litigation. You can set up an LLC to protect yourself and insure properties against damage, which makes the risks of real estate investing low.
8. You can get creative with your financing. Another reason I like real estate is that you can use other people’s money. There are a dozen ways to do creative financing, but some examples include:
The first way to do this is to bring in a partner who will put all the money into the deal. They will provide the down payment and rehab costs, and you split the profits.
You can also take advantage of an owner carry. An owner carry is when a seller owns the property free and clear. They will sell the property and have the note (mortgage) for an agreed-upon period. It’s a win-win because the seller receives the amortized mortgage payment monthly, and you own the property without involving a bank.
9. You are in the driver’s seat. Knowing what you’re doing, you can purchase properties below market value to receive instant equity and cash flow. You can also fix up a property and sell it for a profit.
10. You can play “real life” Monopoly. You can start investing in real estate by purchasing one small property, fixing it up, and renting it. Then, when the time is right, you can sell it and upgrade to a better investment. A better investment may be more units closer to your home so it’s easy to manage, a newer unit with less maintenance, or a more desirable unit that will attract great renters. You can also utilize a 1031 exchange to roll the proceeds into your new property without paying capital gains taxes.
