Why invest in Real Estate?
There are different ways one can stick their money. It can be under a pillow, stocks, bonds, savings, mutual funds, CD, currencies and of course real estate. There are pros and cons of each option. An inexperienced person would often say that real estate investing is risky. But for those who invest their time in understanding this game and the nuances of real estate, it is one of the best vehicle to grow your money and make your money work for you instead of you working for the money. We say that because it has following benefits:
This is one of the best ways to retire early and maintain the same lifestyle. The cash flow is passive income where one’s assets are working for them 24x7 to make them more money. This income allows one to spend their time building more businesses, traveling or reinvesting in real estate. The cash flow from real estate is more stable and predictable than most other businesses. Cash flow enables people to help float through the bad times and live well during the good times.
Over the long term, history tells us that real estate prices have only gone up. There are periods of recession and people can buy at the wrong time but if they hold the property during recession time, and keep getting the cash flow, the property prices would come back up and higher than ever. A person shouldn’t treat real estate as a short term game but should be in it for his life. It’s almost guaranteed that the prices of real estate in 30 years would be worth far more than what you are going to pay today.
It’s best to ask oneself the following question. Who out of the following keeps the most money to himself:
Bob: Earns $100,000 via regular job (W-2)
Martin: Earns $100,000 via owning a business
John: Earns $100,000 through rental properties
That’s right: John does. The worst tax code is for employees who end up giving away 50% of their earned income in different form of taxes back to government. In other words, a typical employee works January to June for government, then July to October for banks/mortgage companies and then last two of the year for his own family.
On the other hand, the government rewards rental property owners. Not only is the cash flow received from the rentals not subject to self-employment tax, the government offers tax benefits including depreciation and significantly lower tax-rates for long-term profits.It's no secret that because of depreciation and mortgage interest deductions (if you leverage your capital), your cash flow should be tax-free.
Hedge Against Inflation
Can one imagine paying ten dollars for a dozen eggs? Or five dollars for a candy bar? The prices may seem exorbitant to some, but this will eventually happen due to inflation in the time to come. Inflation leads to increase in prices due to decrease in the value of money.
Investors who owns rental properties love inflation while others fear it because everything would become expensive. When the price of a dozen eggs hits ten bucks, guess what else is going to shoot through the roof? Everything, including rents and property values! The one thing that won’t increase, however, is the fixed-rate mortgage payment. In other words, as inflation pushes the cost of living higher and higher, the cash flow will only increase. This is why real estate is often called “a hedge against inflation." When inflation hits – Investors are ready!
One of the best thing that real estate provides is the benefit of leverage. Real estate is one of the few investment vehicles where using the bank's money couldn't be easier. One gets to control a very expensive asset and enjoy all its benefits while only putting in a little bit of money upfront. The can be as low as 3.5% via FHA loan for first time home buyer. It even helps increase the potential rate of return on the asset compared to using one’s own cash.
Case-1: The buyer uses a relatively small percentage of his or her own money to make the purchase, and the majority of the money is being provided by the lender.
Property Value: $500,000
Down Payment: 20% ($100,000)
Mortgage: 80% ($80,000)
Case-2: The buyer uses all his cash to purchase just one property paid full in advance
Property Value: $100,000
Down Payment: 100% ($100,000)
Mortgage: 0% ($0)
Let’s assume that the property appreciates 5% per year. At the end of first year
Property Value: $525,000
ROI: 25,000/100,000 = 25%
Property Value: $105,000
ROI: 5,000/100,000 = 5%
Difference in growth of money is 20,000 between case-1 and case-2 in just one year. Now think about how much would that be over the span of 30 years. Over time, the use of leverage can have a significant, positive impact on your net worth.