Not everyone is cut out for real estate. A property investment requires quite an independent spirit, an understanding of market trends and an ability to swallow and trudge through the failures that come with the risks. Still, for those whose enthusiasm for entrepreneurship and business run strong, the right real estate investments can net incredible financial rewards.
With the right location, understanding of taxes and a proper estate plan, you can rake in the benefits of a good real estate investment in no time. If you’ve considered dabbling in the world of real estate investment, here are 5 of the top ways you should think about investing.
Cash Cow/ Flow
For anyone who doesn’t have a rich aunt to spot them cash in a bind, cash flow is vital. No cash flow means no income and for many no lifeline. Here’s where real estate investments can be an interesting option for entrepreneurs. Most conventional businesses can take years to turn a profit and see a steady cash flow. Real estate investments, however, can return a positive cash-flow stream almost as quickly as they get kicked off of the ground. Monthly rent is typically higher than long-term mortgage payments so realtors can typically reel in cash as soon as they’ve found a rental tenant.
Reap the benefits of a real estate cash flow by sticking to the “1% Rule.” If your plan is to buy a property that you will rent to tenants, use the “1% Rule” to determine whether or not the property is worth the expense. With the 1% Rule income producing properties have to produce 1% of the monthly price paid. So for instance, if you’ve bought a property for $150,000, then your monthly rental income should be one percent of the cost or $1,500. New rental investors should look to the rule as a way of determining how long will it take their property to pay for itself.
Tax Saver And Lower Rates
Uncle Sam offers quite a few tax benefits to encourage real estate investment. More than any other for-profit group in the country, real estate investors are subject to the lowest taxes. The IRS allows real estate owners to reduce earned income tax on cash flow by taking a depreciation deduction on properties. Not only can these benefits inflate overall earnings but they’ll also allow real estate investors to deduct expenses incurred by renting.
It’s here that it becomes important to keep in the mind that the IRS views real estate investment efforts as a business. This means you’ll get to claim the “necessary and ordinary“ deductions that business owners content. Mortgage interest, insurance, and maintenance expenses included.
The Loan Pay Down That Bumps Your Net Worth
When owners rent out a property, the essentially tenants become the ones to make a mortgage payment. This increases monthly net worth and because of the loan pay down, rental properties become, in essence, an automatically growing savings account. Consider a property that you owe $200,000 on. In two years you might only owe $190,000 because a tenant makes the payments for you. Which means that in just two years you become $10,000 richer. By the time you pay your down to zero, you’ll have an asset that you can sell or continue to rent.
The value of a real estate investment doubles every twenty years. Sure, recessions will cause it to fluctuate in the short term, but population inflation nudges in the rising direction over the long term. Here’s where real estate investments triumph over stocks. No other investment on the market allows an investor to finance an asset largely based on loans and then have that asset return enough cash flow to pay off its own debt. For real estate investors, properties can become more than just a cherry on top of the other ways they make money.
The Investment That Gives you More Control
As a real estate investor, you can garner much more control over your property than you would just by playing the stock market. Stock investors have a nearly zero chance of influencing the decisions and management that swirls around their investment. On the other hand, real estate investment allows financiers to largely have an influence on returns. Not only can you look into and pick out the most profitable investments, you can add value to the property through renovations and rental rates. Of course, it’s an investment that requires quite a bit of work, but the payoffs almost always surpass the stock market rewards.