For Investors
Thinking of Investing? In the current market, buying opportunities abound. It is important, however, to have a clear picture of what is involved. Investing in income producing properties has many potential benefits, if it is undergone in a methodical manner and a long term view:
- Long term investment growth. Historically, real estate grows in value. Think of how much our grandparents paid for their home and how much it is worth now. If you buy now, and rent the property, if it grows in value during the next 10 years, that value is yours if you decide to sell. Additionally, rents generally go up during that same time.
- Depreciation. The IRS allows for the recovery of cost involved in maintaining a property. Imagine you buy a car this year for $20,000. If you sell the car next year, is it still worth $20,000? No. If that car is a business vehicle, you can deduct the loss. It is similar for real estate. While the property is actually increasing in value, the IRS allows you to deduct a loss from your tax bill, potentially reducing your tax burden. Are there more details to how depreciation works? Yes, it is important to speak with your tax advisor to learn the guidelines and make sure it is done correctly.
- Cash Flow/Rent Proceeds. Many investments do not pay dividends. In other words, the investment may grow in value, but you can't have any of the profit until the investment is sold. With income producing property, while the investment can grow in value, and the investor also receives part of the benefit in a monthly rent check. As the years go by, if the rent increases, the cash flow increases. In the first year or two, one may not 'make' much more than the mortgage. After a few years, if the rent has increased, the property actually produces positive cash flow, in addition to the depreciation and growth in value. Currently, there are buying opportunities (foreclosures, short sales, etc) that help reduce the initial cost of the property and low interest rates that reduce the monthly payment. This increases the possibility for more equity growth in the future, and increased cash flow possibilities.
- Principal (loan) pay down. Every month that the tenant pays rent, a portion of that goes toward the principal of the loan. Even if the property didn't increase in value, the tenant pays the loan down for the owner.
Are there negatives? It depends on how success is measured. Real estate investing is not for everyone. Real estate investing is generally longer term. 'Flipping' is not as easy at TV makes it appear, repairs may be needed, rent needs to be collected, will you hire a property management company, etc. The investor needs to consider these factors along with the benefits and personal circumstances, prior to making an investment. Let us know if we can help with this.
