Investing in real estate should be treated like any other investment you make. You need to fully understand what you are getting into and the risks associated.
ALL investments have some sort of risk. Even keeping your cash in a mason jar in the back yard has risks, and not just that you’ll forget where you buried it. Cash or CD’s paying a very low return carry “inflation risk.” This means that if you consider inflation, and you don’t earn more than inflation, you’re actually losing value in your money. Inflation averages around 3% per year. So, your money has to gain 3% in order for you just to keep up with the same buying ability for the same dollar.
Investing in mutual funds has “hidden fees” risk. Most mutual funds carry significant fees, anywhere from 0.5% to 5% which “drain away” from your balance without you knowing it.
There are many investors who view real estate as too risky of an investment to get involved in. Another camp looks at real estate as the best way to make sustainable wealth now and in the future. The benefits of investing in real estate greatly outweigh the negatives. There is risk with everything you do, but real estate offers security and benefits that no other form of investing can match.
Top Reasons to Get Into the Real Estate Business
- Tax benefits. The tax benefits alone make real estate an attractive investment vehicle. On any rental property you own you can write off mortgage interest and depreciation. Because of this the money you make from cash flow is essentially tax free. You can also use rental properties to claim deductions that will lower your taxable income for the year. Even when you decide to sell you can take advantage of a 1031 tax exchange so you do not have to pay the full capital gains tax. There are many ways to use the tax code to help your real estate business. And, passive income, is taxed at the lowest level.
- Appreciation. Buying a piece of real estate often times holds greater future value. Of course this is not the case all of the time but over the past several years we have seen values increase. All markets work in cycles but in most cases property values will appreciate five and ten years down the road. This gives you the ability to cash in on your investment when you sell in addition to see the rewards every month.
- Cash flow. Owning the right rental property allows you to collect checks every month while still looking at the future. Running a rental property is not easy but it could offer a higher monthly return than anything else you do. The beauty is that this cycle can continue in much the same way for years to come. With the right property and the right tenants you can see cash flow for the foreseeable future.
- Leverage. Real estate is one of the few investment vehicles where using the bank’s money couldn’t be easier. The ability to make a down payment, leverage your own capital, and increase your overall return on YOUR investment is incredible.
- Uncapped returns. With IRA’s and bonds you know what your annual returns will be from the first day you own them. In most cases these returns will be less than 2%. While this may be considered safe there is something to be said for the returns you are not making on your money. Real estate gives you the ability to earn an unlimited amount of money on every deal. Some deals you can earn a 20% rate of return while others only 10-12%. The upside potential is much higher in real estate than anything else you will get into, including the stock market.
- Private money lending. Real estate deals thrive on private money lending. Most property rehab projects can’t get bank funding. So real estate investors are needed. These returns can be extremely attractive AND they are guaranteed with real estate.
Some of the most successful people have accumulated their wealth through real estate. There are risks associated with every type of investing but only with real estate does the reward make sense.
J. Keith Maxwell is the Office Manager for Astute Home Solutions in Madison, AL. He buys and rehabs houses in order to make neighborhoods look better, to help employ others, and to help homeowners out of difficult situations. Call him at 866-HOMES60.