Introduction to Real Estate Investing
Holding real estate as an investment is an excellent way to diversify your portfolio while building long-term wealth. I personally believe that it's one of the most effective wealth building strategies available today.
I personally diversify my investments in many different ways, but here are 10 reasons that I like real estate the best:
Appreciation: Despite the recent real estate crash, when you look at real estate over the long haul, it’s accurate to assume some level of appreciation in your real estate holdings. Yes, there are market cycles where values rise quickly or fall quickly, but by and large, real estate is an asset class that appreciates. In addition to this, investors have the ability to research market dynamics and make fairly knowledgeable decisions based on anticipated appreciation for a particular market.
Passive Income: Holding real estate can be a very passive investment that provides returns much higher than could be obtained through other passive investments (ie. stock, bonds, etc.). With the ability to outsource property management, accounting, etc., investors can still make good returns while playing a very hands-off role in the investment.
High Leverage: Real estate investing is one of the few investment vehicles with the availability of high leverage (ie. financing). Try walking into your local bank and asking for a line of credit for $800,000 secured against only $200,000 of your cash for the purpose of investing in gold, stocks, mutual funds, commodities, etc. They would probably laugh at you. But, if you walked into that same bank and told them you wanted to buy 10 houses at $100,000 a piece …. they would usher you over into their mortgage division to begin working on your 10 loans.
High ROI: With the ability to acquire high leverage comes the ability to obtain a very high return on investment. Not only does your monthly cash on cash return go way up when you use leverage, any appreciation on the property amplifies your ROI as well. This is because the entire asset appreciates rather than just the amount of money you invested as a down payment.
Principle Paydown: A commonly overlooked benefit of investing in real estate using the Buy-&-Hold strategy is the fact that while your tenant may provide you with positive cash flow above and beyond your mortgage payment, they are also helping to pay down the mortgage as well. While the principal portion of the mortgage payment is minimal at first, every year that you own the property the amortization of the principle amount of your loan speeds up. Before long, you are shaving thousands of dollars off of your loan amount every year until ultimately you own the property free & clear.
Tax Benefits: As taxpayers in a tightening tax system, any kind of deduction can be helpful. Holding real estate allows for the deduction of mortgage insurance as well as the depreciation of the property itself. In addition to this, real estate can also afford you the opportunity to defer tax liability by using 1031 exchanges to continue investing funds in new properties while deferring tax liability indefinitely.
Hedge Against Inflation: Many analysts believe inflation is coming (if not already here). Holding real estate and using leverage is a great way to hedge against coming inflation. If prices rise, so will the cost of housing … owning an asset that rises with the tide is a great way to protect your wealth.
Increasing Rents: Very few would speculate that housing rents will decrease over time. Most analysts have already stated that rents are expected to increase over the coming years. Holding real estate not only allows you to lock in housing prices and interest rates, it also provides you with an opportunity to increase future cash flows by increasing rents … thus increasing your ROI in future years.
Retirement Income: For those investors that look at real estate investing as a very long term proposition, the potential to retire on rental income is very real. I know many investors that have owned real estate for multiple decades as a retirement strategy and ended up very wealthy as a result. Over a 20-30 year period of time, investors can own numerous properties free & clear and create a net worth well into the millions. Additionally, the cash-flow that can be generated from properties that no longer have mortgages can be very nice supplements to pensions, 401Ks, social security, etc.
Creative Exits: One of the best characteristics of real estate investing is the plethora of strategies that can be employed when selling a property. Real estate is nice because it doesn’t have to be a permanent proposition. You can own a property for 1 month or 50 years … it’s completely up to you. When it comes time to sell a property, investors can use any number of different strategies to maximize profits.