Did the recent big drop in the stock markets give you a scare? Maybe it even gobbled up another chunk of your retirement savings. Those numbers just disappeared off your financial statement. Real estate being a physical and stable asset is the number one reason people invest. No one is making any more of it. As long as you stay current on mortgage and tax payments along with carrying insurance, you’re highly unlikely to suffer a major loss. No worrying if your portfolio is invested through the next Bernie Madoff.
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 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 some cash each month. Low and behold, all along you are earning equity and appreciation. That makes for a hec’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. 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. 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 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 Nations putting up unknown billions in capital and guaranteeing even more billions in loans. After almost 50 years of business, most of the 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 double or triple your holdings.
Besides the cash flow, the tax savings are another huge reason to invest in real estate. Although the new tax laws are still rolling out, real estate has historically 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:
You may not be aware of it but there is something called a 1031 exchange that can be used to defer or avoid paying capital gains tax when you sell the property. It even has what is called a “safe harbor” process to assure 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 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 is the beginning rather than a full introduction of why so many people invest in real estate.
What do you say to the beginning investor? Please leave a comment.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.