Did the recent big drop in the stock markets give you a financial scare again? Was it another reminder of how Wall Street has gobbled up big chunks of your retirement or investment savings in the past? Every time this happens, the numbers just disappeared off your financial statement. The fact that real estate is a physical and stable asset is the number one reason people invest.
There is a finite amount of real estate and the Wall Street gurus will never be able to create more out of thin air. As long as you stay current on mortgage and tax payments along with carrying insurance, you’re highly unlikely to suffer a major loss. You never have to worry if your portfolio is invested in what will turn out to be the next Bernie Madoff type Ponzi scheme or any other Wall Street scandal.
Serious investors aren’t even concerned if the real estate market turns sour. There are ways to make money under any market conditions. Savvy investors made a killing with foreclosures and short sales during the Great Recession. Although real estate isn’t always very liquid, there is cash flow to be made while holding long term through rents, second mortgages, and other creative ways.
When a tenant pays you rent, they are repaying you all of the original capital you put in – one month at a time. Tenants provide the cash flow to repay the mortgage. And you are pocketing cash each month as your reliable profit. Low and behold, all along you are earning equity and appreciation along with that monthly profit. That makes for a heck of a return on investment. You’re likely to invest $10,000 and take out a $140,000 loan with a 15-year mortgage. By the end of the 15 years, tenants have paid off the loan, returned your investment to you, and you are the full owner of an appreciated $250,000 asset (after beginning with an initial $10,000 investment). What’s your level of confidence that the stock market or any other investment vehicle will do that for you?
The barrier to entry in the real estate market is low. The barrier to entry is the level of difficulty it takes to succeed in a business or industry. Other than a lemonade stand, real estate has about as low of a barrier as there is. Consider the other end of the spectrum. When Airbus decided to enter the commercial airplane manufacturing business it faced an enormous barrier to entry. It required a syndicate of multiple European National Governments putting up unknown billions in capital and guaranteeing even more billions in loans. After almost 50 years of business, most of that investment still hasn’t been repaid. That makes turning $10,000 or less into $250,000 in 15 years a very low barrier to entry. Not only that but during those 15 years, you are able to borrow against your original investment to buy more real estate that doubles or triples your holdings.
Besides the cash flow, the tax savings are another huge reason to invest in real estate. The new tax laws benefited real estate investors and historically real estate has always been a safe haven from taxes. Exactly how this works out for you depends how you structure your business but these are a few tax deductions that real estate investors claim:
• Interest paid on mortgages
• Property taxes
• Repairs and maintenance
• Travel costs (mileage and more) and other business expenses
You may not be aware of it but there is also something called a 1031 exchange that you can use to defer or avoid paying capital gains tax when you do sell the property. It even has what is called a “safe harbor” process to assure that you don’t owe taxes.
Real estate investing is also extremely flexible. It’s not at all uncommon to make a million or three million dollars working at it part time. Part time doesn’t even need to take much time if you use a property management company or buy a turnkey rental. The $10,000 investment example used isn’t a minimum. There really are very low cost and free ways of getting started. Birddogging investment opportunities for other investors is free and lease options are very low cost. There are also lots of financing sources available when you have an irresistible deal on the table. This nothing more than a short introduction to the reasons so many people become real estate investors. You would be wise to take the time to further investigate your opportunities.
What do you say to the beginning investor? Please leave a comment.
Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].