INTRODUCTION
Social media platforms, TV programs, newspapers, and any media that offers a platform for self-professed investment gurus are on a high these days. Check or tune in to them and you will be bombarded with “get-rich-quick” schemes from people who claim to be masters in investment tactics in real estate.
Please enjoy our video that explains the pros and cons of real estate investing and the type of tenants you can find to help you generate income. Then keep reading and book a visit to review your sitatuion. Where we can plan to help you aquire a property to help you generate an income stream.
What they are doing though is focusing on high-risk investment strategies rather than gaining from stable appreciation from property values. This is not the right approach for an average investor who will find it very difficult to recover from losses in case they face any pitfalls. Rather, the way forward should be reasonable investing in real estate that provides steady low-risk income.
In this blog post, we’ll examine the tried-and-true tactics that can be used to increase your income, pay off debt … even fund your retirement!
WHY INVEST IN REAL ESTATE?
Real estate will never go out of fashion and the reason is very simple, everyone needs a roof over their heads. Housing is the largest expense for the average American as per data released by the most recent Consumer Expenditures Survey released by the Bureau of Labor Statistics.
Apart from housing considerations, there are several reasons why real estate is a great investment choice. This blog post will go into the top five of them.
1. Appreciation
Real estate markets are typically volatile and rise and fall are regular features. But historically, it has been proved that real estate values always bounce back and appreciate steadily over time. Even the horrific recession in the U.S. housing market in 2008 was no exception. Prices fell sharply and it took several years to regain the pre-recession levels but it did. That is important. It can thus be said with certainty that real estate values appreciate over time.
The S&P CoreLogic Case-Shiller National Home Price Index, which tracks U.S. residential real estate prices, released its latest results on August 29 with the headline “National Home Price Index Rises Again to All Time High.”2
| Source: ZeroHedge |
Any investment that you make will always have a certain element built-in risk, minor or major, depending on the type you are putting your money in. Real estate though will not let you down and has traditionally been the most solid investment choice over the long run.
2. Hedge Against Inflation
Prices of goods and services rise over time and this is called inflation. It is a worldwide phenomenon and some pundits say it is good for economic growth.
When inflation rises, the prices of commodities go up. Hence, the money you have with you can buy less of them, leading to a fall in your purchasing power. Fortunately, along with goods and services, the price of real estate also rises, often exceeding the rate of inflation. This means that the value of the money you have invested also rises, acting as a buffer against inflation. Real estate investment is one of the smartest ways to guard against inflation.
3. Cash Flow
A crucial benefit of real estate investment is that, unlike stocks and securities, it provides a steady monthly income over time. This is when you decide to rent out your property to receive a stable cash inflow every month.
If you have invested wisely, the cash flow will cover your mortgage payments and any repairs and maintenance required. You might even have some cash left over to quickly pay off your mortgage, meet your regular household expenses, or even save for a down payment on another property.
Look at it this way. If your rental property covers your regular mortgage payments, you are getting your house for free as you do not have to spend anything from your pocket. As the mortgage payments continue, your equity on the house increases till the mortgage is cleared off and you own the property. The rent remains your residual cash flow for years.
The appreciation of the property value comes in handy too when it is time to sell and is a great way to save for retirement, your child’s education, or even a rainy day. For example, buy a house when your child is young and pay off the mortgage by the time they are ready for college. Now, you have a clear asset that can either be sold or the rental income used to pay for their tuition expenses.
4. Leverage
One of the unique features that sets real estate apart from other asset classes is the ability to leverage your investment. Leverage is the use of borrowed capital to increase the potential return of an investment.
For example, if you purchase an investment property for $100,000, you might put 10% down ($10,000) and borrow the remaining $90,000 in the form of a mortgage.
Even though you’ve only invested $10,000 at this point, you have the ability to earn a profit on the entire $100,000 investment. So, if the property appreciates to $120,000 – a 20% increase over the purchase price – you still only have to pay the bank back the original $90,000 (plus interest) … and you get to keep the $20,000 profit.
That means you made $20,000 off of a $10,000 investment, essentially doubling your money, even though the market only went up by 20%! That’s the power of leverage.
5. Tax Advantages
A very critical reason for investing in real estate is the tax benefit it offers. There are many ways that you can save money every year on taxes.
Given here are some of the key ones.
Depreciation
When you prepare your tax return for a year, you must include the rental income from a property but you also get deductions such as interest on mortgage, repairs, and any other expenses linked to the investment. Depreciation on the value of the property is another deduction that you are eligible for.
Depreciation is the assumed loss in value of real estate due to aging. As the years pass by, your home will need structural repairs, and systems and appliances will need to be replaced. Hence, you get a tax rebate as depreciation for all these factors. On the other hand, as we have seen before, the value of real estate has increased over time.
Considering these aspects, investment in real estate is appealing because you are claiming a “loss” on your investment in a property that is actually gaining in value.
Serial Home Selling
Even if you’re not interested in owning a rental property, other types of real estate investments offer tax advantages, as well. Generally, when you own an investment property you pay a capital gains tax on any profits you make when you sell the property.
However, when you sell your principal residence, you are exempt from paying taxes on capital gains (up to $250,000 for singles and $500,000 for couples). The Internal Revenue Service (IRS) only requires that you live in the house for two of the previous five years. That means you can purchase an investment property, live in it while you remodel it, and then sell it for a tax-free profit two years later. This can be a great way to get started in real estate investing.
Section 1031 Exchanges
In addition to profiting off of your personal residence tax free, it is possible to sell an investment property tax free if you do it through a 1031 Exchange. If structured properly, the IRS Tax Code enables an investor to sell a property and reinvest the proceeds in a new property while deferring all capital gains taxes.
Tax-Deferred Retirement Account
It’s a common misconception that you can only purchase financial instruments (i.e. stocks, bonds, mutual funds, etc.) through an Individual Retirement Account (IRA) or 401(k). In actuality, the IRS allows individuals to invest retirement funds in real estate and other alternative types of investments, as well. By purchasing your investment property through an IRA, you can take advantage of all of the tax savings these accounts offer.
Be sure to consult a tax professional regarding all tax matters related to your real estate investments. If structured correctly, the profits you earn on your real estate investments can be largely shielded from tax liability. Just another reason to choose real estate as your preferred investment vehicle.
TYPES OF REAL ESTATE INVESTMENTS
While there are several ways to invest in real estate, we will go into detail on three of the main ones that you can follow to make money in real estate.
1. Remodel and Resell
This model of investment is commonly called “Fix and Flip” and you might have seen countless reality shows where money gurus recommend this method of real estate outlay. It is the process of buying a property, remodeling, and updating features quickly to increase the curb value and reselling it at a profit.
This tactic is not without risks though this is a magic formula that is much touted by investment pundits. While huge profits are promised quickly, investors must understand the risks involved too, and must make provision for additional expenses if required.
To be on the safe side, before you embark on one such venture, get in touch with experienced real estate professionals. Not all properties are suited for this “Fix and Flip” investment technique and they can help you identify properties that are ideal for this investment strategy. You can then avoid likely pitfalls that could derail your plans for a quick turnaround and profit.
2. Traditional Rental
One of the more conservative choices for investing in real estate is to purchase a rental property. The appeal of a rental property is that you can generate cash flow to cover the expenses, while taking advantage of the property’s long-term appreciation in value, and the tax benefits of investing in real estate. It’s a win-win, and a great way for first-time investors to get started.
And according to the U.S. Bureau of Labor Statistics, rents for primary residences have increased 21.9 percent between 2007 and 2015 as demand for rental units continues to grow.1
3. Short-term Rental
With the huge movement toward a “sharing economy,” platforms that facilitate short-term rentals, like Airbnb and HomeAway, are booming. Their popularity has spurred a growing trend toward dual-purpose vacation homes, which owners use themselves part of the year, and rent out the remainder of the time. There are also a growing number of investors purchasing single-family homes for the sole purpose of leasing them on these sites.
Short-term rentals offer several benefits over traditional rentals, which many investors find attractive, including flexibility and higher profit margins. However, the most profitable properties are strategically located near popular tourist destinations. You’ll need an experienced real estate professional to help you identify the right property if you want to be successful in this highly-competitive market.
DOES REAL ESTATE INVESTING SOUND TOO GOOD TO BE TRUE?
We’ve all heard stories, or maybe even know someone, who struck it rich with a well-timed real estate purchase. However, just like any investment strategy, a high potential for earnings often goes hand-in-hand with an increase in risk. Still, there’s substantial evidence that a well-executed real estate investment can be one of the best choices for your money.
Purchasing a home to remodel and resell can be highly profitable, as long as you have a trusted team in place to complete the remodel quickly and within budget … and the financial means to carry the property for a few extra months if delays occur.
Or, if you buy a house for appreciation and cash flow, you can ride through the market ups and downs without stress because you know your property value is bound to increase over time, and your expenses are covered by your rental income.
In either scenario, make sure you’re working with a real estate agent who has knowledge of the investment market and can guide you through the process. While no investment is without risk, a conservative and well-planned investment in real estate can supplement your income and set you up for future financial security.
If you are considering an investment in real estate, please contact us to set up a free consultation. We have experience working with all types of investors and can help you determine the best strategy to meet your investment goals.
Sources:
- Bureau of Labor Statistics Consumer Expenditure Survey Annual Report – https://www.bls.gov/opub/reports/consumer-expenditures/2015/home.htm
- S&P Dow Jones Indices Press Release –
https://www.spice-indices.com/idpfiles/spice-assets/resources/public/documents/574349_cshomeprice-release-0829.pdf?force_download=true - Durden, T. (2016 November 29). US Home Prices Rise Above July 2006 Levels, Hit New Record High [blog post] ZeroHedge –
http://www.zerohedge.com/news/2016-11-29/us-home-prices-rise-above-july-2006-levels-hit-new-record-hig
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