Real Estate Investment Advantages
Stable Values and Appreciation:
One of the safest ways to invest is to own real estate. It is very appealing to purchase a distressed property at below- market value. However, you can also buy properties at market value and as a result of the natural "appreciation" that is inherent in real estate, you will continue to have a safe, long-term investment which produces very reasonable returns. Real estate has cycles with regards to market values. We are presently experiencing one of those negative cycles, which is why now is a good time to purchase properties. There are unusual bargains on the market today. And in time, as real estate values stabalize and increase, you have gained valuable appreciation and equity in these properties. (% Appreication in 5 Year Increments). Another reason the appreciation of real estate will most naturally continue into the next 50-year cycle is that population estimates far exceed the present inventory of homes. It is estimated that the population of the US in 2050 will approach 400,000,000 persons (See the US Census Population Clock). These forecasts for population growth combined with the simple rules of supply and demand indicate that real estate will continue to be a valuable, appreciating asset. We all know what we paid for our first home. If we were to stay in that home for a number of years we immediately recognize the principle of appreciation as we market that home. An average single family home purchased in 1970 had a cost of $23,400. In 2000, similar homes sold for $169,000. In 2008, the average home price in Northern Utah was $262, 132 which represents an annual increase of 7% of the value of the home for each of the last eight years. Compare (Return on Investment) in the stock market versus real estate since Jan 1, 2000 to September 30, 2008.
Principle Reduction:
Another benefit of owning real estate is the ability to use other people’s money (OPM) to pay principle and interest payments. When one rents or leases a property to another, the investor uses that income to pay down the principle and increase the equity of that property. The net result is that while the property is appreciating, the principle owed on that property is being paid down by others. This increases the equity for the owner in two ways. (Amortization Schedule PDF Showing Principle Reduction Over Time) Welch Agency.com calculators
Tax Benefits:
Another important benefit of owning real estate is that it allows you to build your net worth without incurring heavy income taxes. Investors can take advantage of cost recovery (depreciation), and losses on property to reduce other income sources from tax incumbrances. Savings will vary depending on your tax bracket. The nice thing about owning real estate is that you are not taxed on the increasing values of your properties until you sell them. Properties held over one year will be taxed at the capital gains tax rate, rather than the higher rate applied to personal income. In addition, when a property is sold it can be done with a 1031 exchange, allowing the investor to sell properties and buy new ones and defer those taxes until a later time. With appropriate legal and accounting advice, you can also establish Family LLC’s twhich will transfer your net worth to your children and protect it from excess taxation.
Cash Flow:
Another benefit which can be enjoyed from real estate investments is the cash flow that is generated by these properties. It is important to understand that different types of real estate purchases will yield differing cash flow returns. Buying a home with a mortgage and renting it out should generate positive cash flow, but not much. To improve initial cash flow, an investor can put more money down at the time of purchase. Businesses need cash flow to survive so it is important that each of the properties you purchase creates a positive cash flow, or that you have resources to supplement the property during a vacancy or for maintenance reasons. During the initial years, renting the home may not generate great amounts of cash. However, when the home is paid off it will generate a great deal of cash income for the retirement years. Most desireable is the fact that the mortgage was eliminated by those renting the income properties. You have the benefit of gaining a valuable asset which will cash flow as future needs increase and will be paid for by others.
To increase the cash flow from investment properties one could invest in warehouse, office, or retail space which has greater risk accompanied by a greater return on initial investment.