The 6 Greatest Benefits of Investing in Real Estate
Updated: Feb 26, 2019
"Turning real estate into an asset thus capitalizing on it's great benefits has the ability to be a life changer - if done right"
The idea of investing in real estate has become very popular. This is due to the fairly easy to replicate business model that allows you to put yourself or your business in a position to produce a generous return and abundance of information available to us on the internet.
Real estate as an investment can offer invaluable benefits when compared to similiar investments that compete for your hard earned money.
Today's financial world is as equally intimidating as it is intriguing. There are so many different places and opportunities for you to put your money, that it can become very overwhelming when deciding.
As, with any investment. There is a right way to invest for savvy investors and their is a wrong way to invest for uneducated, newbies. Real estate investing, in particular, has proven – time and time again – that it can serve as a wealth-building vehicle for savvy investors.
For this specific post, we are going to touch on the greatest benefits to buying and holding real estate. By holding these assets for a period of time, you will be able to take advantage of all of these benefits.
All of these benefits do not apply to the concept of buying, rehabbing and selling properties in the short term.
1) Cash Flow
Due to our location, we structure our business around this simple benefit - cash flow. Cash flow is the profit left over after you take away your operating expenses & debt service from your gross monthly rental income. This cash flow will provide on-going, passive income (not always stress free) , allowing you to spend more time on other income producing activities. Once you have stabilized the asset, the cash flow will be fairly predictable every month. This money should be working for you on a daily basis, bring in enough of it and you can quit your day job! (Financial Freedom)
2) Tax Shelter
Taxes are one of the biggest expenses for anyone who produces an income. As a real estate asset owner, you are privileged with some unique tax benefits other investments do not offer. Some of the tax benefits that property owners receive are:
Deductions - Everything from the mortgage interest you pay to the miles you drive to your properties.
Depreciation - We are allowed to deduct our piece of real estate (building not the land) over a certain amount of years. Residential - 27.5 years - Commericial - 39 years.
Here is a quick example. Let's say that you put purchased a 3 unit residential building for $100,000. After looking at the county appraisal on the property, the building is worth 80% of the value of the property. This means that we can depreciate $80,000 of this property. For simple math, $80,000/27.5 = 2,909.10. This means that you can deduct 2,909.10 from your CFBT every year.
We can also depreciate any capital improvements (improvements that extend the life of the building) over the 27.5 years for a residential building (39 for commercial).
For example, let's say that we put a new roof on our building and it cost us $15,000. We would be able to depreciate that $15,000 over the 27.5 years ($15,000/27.5), giving us another deduction of $545.45 from our CFBT (Cash Flow Before Taxes).
Self Employment Tax - Cash Flow received through your rental properties is not subject to Self Employment Tax
1031 Exchange - Time to sell your property? Don't worry, you have a way to avoid taxes in the immediate future too. A real estate investor is allowed to sell their property and push the proceeds into a "similiar" property without paying taxes on the profit earned from the sale. This basically allows you to defer the payment of taxes until you sell the next property (unless you do another 1031 exchange).
Tax Free Refinances - It is not to often where you can pull out a large chunk of money from anything and not pay taxes on it. Let's say you practiced the BRRRR strategy and bought a property for cheap, rehabbed it and refinanced it. You have $70,000 cash in the property but the house is worth $115,000. If this is a single family, you will be able to pull out 75% of the ARV. This will allow you to pull out $86,250 (prior to paying closing costs) tax free!
3) Loan Pay Down
This is a concept that almost any one can understand. If you purchase a property, using any means of financing (private or traditional), where you will have a mortgage on the property, you will experience a loan pay down. Each month your tenants will be paying down the principal amount that you owe on the property. When your tenant is paying down your mortgage each month, you will be increasing your net worth with each and every payment. This creates a savings account feel that begins to grow automatically, without you depositing a dollar into the "bank. Essentially, your tenant is paying you to become wealthy, just think about that!
This benefit will be more valuable to some. This all depends on the location of the property. As we all know some areas appreciate much more than others. Places like Los Angeles may see an astonishing appreciation rate of 10%-20% (will also see greater corrections) while others, like myself may see a 0%-3% (if we are lucky) in Upstate New York.
With that being said, how appreciation works is while the loan is being paid down, the value of the property is increasing. Traditionally real estate is a fairly safe bet when it comes to appreciation, it just depends on how much you will see. Find out what your local appreciation rate is and try not to buy on appreciation alone (unless you live in one these crazy appreciating areas). So in 30 years, if you still own the property, it will be worth far more than you paid for it today.
Buying real estate allows you to exercise the phenomenon called leverage. This means that it is entirely possible to purchase a property worth $1,000,000 for $200,000. The best part about this, is that you don't always have to even use your own funds. The reason this is cool is because you can use far less money to acquire an asset worth far more than you have to come out of pocket. Let's take stocks for example, stocks require 100% of the investment upfront (unless you are buying on margin). Leverage will allow you to purchase more properties and scale your portfolio, leading you to the financial freedom we are all looking for!
One of my favorite benefits of investing is real estate is the control you have over the asset. I do not like being in the unknown when it come's to my destiny or my future. When you invest your money in real estate, you will be in control of your destiny. You will have no one else to blame but yourself. Some people like this pressure, while others would rather delegate. If your like me, you do not want to delegate your future. Take Control!
You can always visit the property and see what condition it is in.
You can add value through real life repairs to increase the value of the asset.
You can replace bad tenants with new tenants to sustain the value of your property.
Increase rents to increase your Gross Operating Income
Decrease your expenses to Increase your NOI
This is the best part about real estate. You will be hands on in building your future for your family. Real estate is powerful but just like with anything, only if you work it right.
You must learn how to market to find great deals, run the numbers on a real estate investment, find reliable, quality contractors to add value, understand property management, be able to deal with tenants and learn how to finance or find funding for your investments.
"It's all a game, just learn how to play it right"
Investing in real estate is typically not a get quick rich scheme. As you can increase your income substantially through different vehicles, you will most likely be taking a journey to increase your net worth and build passive income. As many others have discovered, this journey is well worth the trip and is typically very rewarding. Just like with anything that is worth it, it will take hard work, educating yourself and building relationships. Nothing worth while is easy. So start taking the steps to put yourself and your family in a better position and begin building your financial foundation.
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