Investing 101 Series – Part 10: Why Real Estate Is One of the Best Investments
For those who find the stock market too complicated, real estate offers a very good investment vehicle with tax benefits.
I would caution, though, it is not for everyone. There are many factors that influence success in real estate investments. Of course, location is the key to all good real estate investments. Tax benefits are important so there has to be some knowledge of tax laws pertaining to real estate, it’s advisable to have an expert tax accountant proficient with these laws. You’ll also need to be a little handy for dealing with the various trades you will need for repairs and maintenance, and you’ll need the ability to deal with tenants until you can afford a management company. Most of all, you’ll need to have patience. A final note, insurance is critical.
The article below gives a good overview of the advantages of real estate investing.
Why Real Estate Is One of the Best Ways to Make Money
By: Pauline Piquing
There are many ways to turn a profit with real estate.
When you buy a stock, the only way you can make money is if the stock appreciates in value, and you sell it at the good time. With real estate, you can make money in many ways, I can name those 12 off the top of my head, and there are many more.
- Rental income. That one is the main source of profit investors are going for when buying a rental, and doesn’t need an explanation.
- Buying low. You turn an instant profit if you manage to buy a property for under market value. Think foreclosures, quick sales, and awesome negotiation skills.
- Selling high. You can make extra money if you stage the property to attract buyers over market value. With stocks, you always buy and sell at market value. With real estate, you can try to beat the market.
- Increasing equity. If you take a mortgage to finance a rental, you are increasing your equity with every mortgage payment. I put down 25% on my last rental and with mortgage repayments am around 33% equity at the moment, those 8% of the property value were paid by rents and are increasing my net worth every month.
- Leverage increases returns. If you put 20% down on a property, you will still receive rental income based on 100% of the property value, making it a great return for your 20%. Say your property is worth $100,000 and you charge $750 in rent with $500 in mortgage, taxes and fees. You have a $250 profit on $20,000 down. That is $3,000 a year, or a cool 15% return on your deposit. Good luck trying to get an almost guaranteed 15% on stocks.
- Leverage makes you profit on the full selling price. If that same $100,000 property you bought with $20,000 down sells for $120,000 a few years later, you get your $20,000 plus principal payments back, and a $20,000 profit. It is only a 20% profit over the full value of the property, but thanks to your leverage, you are making a profit of 100%, minus principal payments to the $80,000 mortgage. The bigger the leverage, the greater the return.
- Renting smaller units. I rent three rooms by the room, to three tenants. I can charge more than if one family was renting the whole place. You can divide your family house into a duplex or a triplex and increase the rent.
- Renting to businesses. Businesses are a different type of tenant and rents are generally higher. They are also safer if you choose a well-known business to rent to.
- Tax benefits on interest. Depending on your country of residence, you can often deduct the mortgage interest from the rental income, and create a tax-free profit.
- Tax benefits on improvements. You can also deduct the cost of improvements from the rental income, while the added value to the property is yours to keep.
- Profit from a lump sum on a refinance. So, you bought your $100,000 place and put $10,000 worth of improvements, that the tenants paid back in the form of rent. The property is now worth $125,000. Because your contractor did a great job, you can refinance to get the $25,000 cash and put 25% down on your next $100,000 rental!
- Profit from extra cash flow on a refinance. If you are able to refinance the property to lower your mortgage bill payments while the rent stays the same, you are generating more cash flow every month. You can build a cushion for maintenance, save up for a deposit on a new rental, or have more passive income to live from.
Learn more about Investments here:
MD Financial Solutions