Many persons dream about owning their own investment properties. It is a fantastic way to build wealth and to prepare for retirement. Popular tv shows focused on flipping homes highlight the fascination people have with real estate.
To understand real estate as an investment, one must delve into the “nuts and bolts” behind the wealth building factors. Real estate holdings are not a get rich quick scheme. Long term holds in real estate cause a compounding effect in building net worth. Investing in real estate must be deliberate and be based on an understanding that one is committed to a long term strategy with real estate.
There are 4 ways real estate has a return on investment. Those 4 returns are appreciation, tax benefits, debt reduction and cash flow. I will discuss them in this order and the ordering is intentional. Most investors make the mistake of making cash flow the most important factor when considering real estate. It is important, though, not the most important.
Over time, real estate appreciates. It goes up in value. There have been shorter periods of time when real estate has lost value, i.e., 2008-2011. In general, though, real estate goes up in value. I bought a 3 unit apartment building in 2001 for $91,000. I placed 20% down and had a 15 year mortgage for the balance. I still own that building and I estimate its value to be $250,000 today. So my down money of $18,200 + closing costs of $7000 has turned into $250,000 in 17 years.
Through tax deductions and depreciation, one is able to create tax savings. These tax savings will depend on your income tax bracket and one should consult with a tax advisor to fully understand the tax implications related to real estate investment. For residential real estate, a person is able to depreciate the property over 27.5 years. Land is not depreciable, however the improvements are. If the purchase price is $100,000 and land is valued at $25,000 and the improvements (building) is valued at $75,000, then one is able to depreciate $75,000 over 27.5 years or $2727/yr. This will assist a person in lessening the tax burden on cash flow benefits.
The greatest rate of return on real estate is realized when one uses financing to leverage success. With the property I purchased in 2001, I had a mortgage of $72,800. Over the span of 15 years, I used the rents paid by tenants to pay the mortgage until I owned the property free and clear in 2016. The “magic” of real estate is the ability to leverage it. For an investment of $25,000, I was able to own a $91,000 property and then I had tenants pay the mortgage off for me. It is a wonderful thing.
One can buy stocks for much less money; however, one owns a piece of paper. With real estate, a person owns a tangible piece of property. You can drive by it, live in it, invest in it and take pride in what it becomes.
I previously mentioned cash flow. This is the income a property produces after all expenses. Real estate has maintenance expenses, tax payments, insurance requirements, management fees and mortgage payments. After rents are collected and expenses are paid, one has either a loss or income. The net income is the cash flow. This is often what an investor is looking for. It is a way to supplement one’s income.
Over time, cash flow increases. Rents go up. The property I purchased for $91,000 now provides me with a positive cash flow of $1500/month. This did not happen immediately. Though 17 years later, it is a gift which keeps on giving.
Learning how to analyze real estate as an investment is a positive way to lessen the overall risk in investing. Call me today to learn how you can build wealth through real estate.