Time and again, real estate investing has proven an effective means of raising capital and building wealth. Below are just some examples of the power of real estate.
Real Estate provides a variety of avenues for profit
Unlike other methods of making money and investing, real estate offers multiple ways to achieve profit. Some examples are:
- Rental Income: The simplest way to earn money through real estate investing is to own a property and collect rent from tenants.
- Flipping: A quick way to turn a profit through real estate is to buy a property at a low price-point, via a foreclosure, short-sale, or down market. When the time is right, the property can be sold at a premium, thus maximizing profits for the flipper.
- Equity: When a buyer uses a mortgage company to purchase a property the buyer earns equity in that property with each payment toward the loan. Each time your equity increases, so does your net worth. The equity you hold in your property is a part of your financial asset portfolio.
- Leveraging a Rental: Assuming a 20% down payment and a rental rate commiserate with the full-value of the property, the owner of a property is not collecting rental income based on 100% of a property’s value while only fronting 20% of the cost to purchase. Each month, rental income will exceed the mortgage plus interest, taxes, and other fees, which means each month turns a profit for the property owner. Over the course of a year, leverage can add up to large profits.
- Leveraging a Sale: A property owner who is already using rental leverage to make a monthly profit can drastically increase one-time earnings through a sale. Should the property increase in value over the period of time which it is owned it can be sold for the new valuation. This sale means instant profit on the loan (100% of the mortgaged amount + the increased value) in addition to the leveraged profits made through renting the property during the period of increasing value.
- Maximized Rental Units: An investor in property is limited by the property only as the imagination is limited. While a home can be rented out as a whole to a single family, it is more profitable to rent out the home by the room. Each sleeping room is worth more when rented to a single occupant than when it is shared among a family unit. In addition, some homes can be remodeled to actually house multiple units, thereby increasing the rental value.
- Commercial Rentals: Renting property to a business is often more stable and profitable than renting to individuals. Businesses have more capital to spend on rent and it is in their interests to stay in one location for a long-period of time.
- Taxes: Although taxes usually carry a negative connotation, in the case of real estate there are many benefits to investors. In many countries the interest on the mortgage can be deducted from the rental earnings reported, lowering the taxes owed and keeping the cash in the pocket of the property owner.
- Tax Breaks: Not only can a property owner turn a profit on straight taxes, there are many deductions available to a savvy improver. When a property’s value is increased through improvements, the cost of those improvements can be deducted from taxes. Some improvements can be 100% deducted, while others are only partially deductible, but a little research before a project can mean a big profit.
- Refinancing for a Lump Sum: Refinancing an existing loan is a great way to quickly increase cash-flow on a property. Rental income can be used to finance improvements which increase the value of the property overall. The new property value can be used to refinance the property. For example: If a landlord increases the value of a $100k property to $125k (using rental profits to pay for improvements) and refinances, the landlord now has $25k cash to use toward the purchase of another property.
- Refinancing for Monthly Cash Flow: Refinancing can also be used to lower mortgage payments. If the rental income remains the same, while the mortgage payments decrease, the difference is all profit for the owner.
Need 2 More Reasons Why Real Estate is a Great Investment Opportunity?
Real estate is less risky than the stock market
If we have learned anything since 2008 it is that stocks are risky. Even the most secure of stocks can tumble at a moment’s notice. Even if an investor leverages a trade (buying a stock without paying the full price, much like a mortgage on a home), should that stock drop below a certain price point, the trading company can call the account, bringing the investor’s balance to 0.
Although real estate values do fluctuate with the market, continuous rental rates do not. If a property drops in value suddenly, the monthly rent collected on the units does not drop in correlation, meaning that the property owner is still turning a profit and still in possession of the property, which will raise in value with the market’s next cycle.
Real estate investing is self-employment
With real estate investing, there is no boss telling you how to manage your properties or your finances. Sometimes, this lack of structure can lead to a lazy property owner allowing a property to rot, tenants to fester, and eventually to an unsalvageable situation. On the other hand, an investor has the power to decide how to improve a property, which tenants to rent to, and when it is time to invest in more property or to give-up the game and sell.
With a little research and a plan for the type of investor you want to be, real estate is a great way to invest money and be your own boss!
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