Different people have different, multiple reasons why investing in real estate is the right thing for them.
On more than one occasion I have been asked by friends and family – why real estate?
- Cash flow
Good old cash flow… for me, that is the biggest advantage. The recurring monthly income I get from my rentals (after all expenses of course, such as taxes, insurance, mortgage payment, management etc’) is usually between 7%-10% of my investment, which is for me, a great monthly income.
Historically, real estate appreciates 3%-4% per year. So, for example, if you purchased a $250,000 property 30 years ago, in today’s market it would be worth more than $750,000, without you doing anything except holding the property (and don’t forget, you need to add that to 30 years of cash flow).
You can start with almost no money at hand. With only 3%-5% down payment required from First-Time Homebuyers, you can buy a property, live in it for 2 years and buy another one. For investment property you will need 20%-25% down payment, but that too, provides you with good leverage ratio.
- Tax benefits
Investing in real estate allows you to take advantage of multiple tax benefit. I will refer to the 3 most clear and easy to explain benefits:
- Deductions, you need to look at your rental as a small business, where rent is the income (sales) and everything else is an expense (so property tax, insurance, mortgage interest, property management fees, repairs, capital improvement, advertising, travel and all related costs will be counted as expenses).
- Depreciation – you’re allowed to depreciate a residential property value for 27.5 years. Please note that you can depreciate only the property not the land, so the overall number would be your Property cost – land cost / 27.5 years.
- 1031 exchanges – you can sell a property after few years and thereby avoiding capital gains or depreciation recapture on the sale of the property, if you buy a more expensive property during a limited time period after you sold the property.
- You can manage your investment yourself
- In most types of investments, you cannot control the results/outcome, and your investments’ destiny is simply not in your hands. In real estate investments you can limit your risks, optimize your investment and expenses, and thus gain more control of your own destiny.
- Starting from the location of the investment, if you have the stomach for high risk you will buy in a ‘C neighborhood’, and get higher returns, but with more potential tenant issues. On the other hand, if you prefer a more solid investment, you will choose a ‘B neighborhood’ property, and get more solid return. This is a perfect example of how your preferences and actions will reflect on your return (its start from how you maintain the property, how good is your screening process, do you manage it yourself or partner with the right property management company etc’)
These are not tax recommendations and I am not a tax expert. I do recommend talking with a tax professional before investing in any property.