SMART Reasons To Invest In Real Estate


Some investors are going for straight monthly income.  Others are looking at growing their equity over time, through rising market prices, plus paying down your loan balance.  And taxes play a big part in your investment decision making, too. It all adds up!



1. Financial Independence


There are many reasons to invest in real estate. First and foremost is "independence". You can do it as a side activity to augment your income, or you can become a full-time, professional investor. It can be as small as you want, with 1 or 2 units, or you can grow to apartment buildings, and build your real estate empire. It's up to you once you get comfortable with it, and what your needs and dreams are. Either way, it's your business!

2. Cash Flow


If you are looking for a steady monthly income, residential income properties are one of the best investments out there. Residential real estate typically beats other types of investments, including savings accounts, certificates of deposit, the stock market, bonds, Treasuries, gold and currency trading.

The main factor to look at for maximizing your cash flow involves your total initial investment. This includes: down payment, closing costs and initial fixup costs. The more you put down, the less your monthly cost are going to be, mostly in terms of your monthly mortgage payments. This is great, but remember that putting down larger amounts, like 50% or all cash, will affect your Return on Investment. See our section on "Leveraging", below.

And with condos, do not forget the monthly HOA fees eating into your cash flow.

Bottom line: you need a complete and accurate calculator to determine the right mix of initial investment, purchase price, cash flow and ROI for your investment needs. We happen to have such a tool: our SMART Residential Income Property Search Engine©. Contact us, and see how well it works for you.

3. Appreciation

In our opinion, real estate investing is the best way to watch your money grow over time, and the rewards far outweigh the risks. Nothing is certain, of course, but here are some things to consider:
  1. As the economy improves, employment rates increase and housing demand follows suit
  2. Rental demand is showing unprecedented growth, and is expected to continue for the significant future
  3. Interest rates are still near historic lows, and will eventually rise, sparking a huge demand
  4. Waiting to get into the game will cost you in lost opportunity gains, in all of these price categories
All these factors point to rising residential income property prices in the near future. As the old saying goes: "Now is a great time to buy". This applies to income property extremely well.

4. Principle Reduction

Mortgage Balance Down▼ - Equity Up▲

Paying off your mortgage is a great way to build equity.  It is a normal part of the lending process, and a significant contribution to the concept of leveraging your investment.

Example
Say you purchased a $800,000 fourplex, putting 25% down at a 4% interest rate.  Your monthly mortgage payment (principle + interest) would be $2,865.

At the beginning, your mortgage balance is $600,000. You are paying $865 a month towards principle, and $2,000 a month towards interest. The principle payments are very small at the beginning.  The lender wants to maximize their interest collection.  However, they gradually increase and the ratio changes.

In this example, by year 5, you will have reduced your principle balance down to $554,067.

Which means you have accumulated $45,933 in equity in those 5 years.  If you sold the property then, that money would go into your pocket (less closing costs, etc.)

5. Tax Advantages

Several factors can help your financial situation relative to income properties. The major tax benefits include:
  1. Mortgage Interest Deduction
  2. Property Tax Deduction
  3. Depreciation
  4. Expense Deductions
As with owning your own home, tax benefits can help turn an apparently unattractive situation into a positive one when managed appropriately.

*** We highly recommend that you consult your tax professional for complete and accurate tax and accounting information applicable to your situation.


6. Easy to Get Into and Work With

  1. Start small: Buy a single family residence or condo, or even a duplex. This should be a straightforward transaction for both the novice or experienced investor, very similar to buying your primary residence. The lending rules are virtually the same as for a primary residence, and the process is easy to understand.

  2. Hands on or hands off: You can choose to manage the property yourself, or outsource to a professional Property Manager. Even though it impacts your cash flow, it is probably best for the first-time investor to use a professional Property Manager. Once you get the hang of it, you can start taking some of the management responsibilities on yourself.

  3. 5+ Multi-unit: Larger apartment buildings (5 units and up) have different lending rules and property management requirements. These are a great way to leverage your investment, but they need quite a bit more experience, plus a higher tolerance for risk and problem solving ability.

  4. Owner Occupied: If you live in one of your units, such as one side of a duplex, you can lower your investment mortgage significantly, and still leverage the full value of the property while it appreciates! With duplexes, for example, you can usually reduce your mortgage by about 1/2.

7. Easy To Grow and Leverage Your Capital

Real estate investing is traditionally the best way to leverage your assets, time and involvement. Many smart investors start out with an investment single family residence, condo or duplex, then, after experiencing success with that type, continue to build on their success buying similar types of units. This creates a "money machine" effect, where you build on your strengths and experience by repeating past successes. Other smart investors like to gain traction with smaller units, then work with larger properties, such as triplexes and fourplexes, utilizing the same techniques but leveraging their base investment even more with larger properties.

Here is an example (*):
SFR DUPLEX TRIPLEX FOURPLEX
Purchase $500,000 $650,000 $800,000 $1,000,000
Initial Investment (**) $137,500 $178,750 $220,000 $275,000
GRM 20 17 14 12
Monthly Rent $2,083 $3,186 $4,762 $6,944
Monthly Expenses $625 $956 $1,429 $2,083
Monthly Net $1,458 $2,230 $3,333 $4,861
ROI 13% 15% 18% 21%
  • (*) Assumes similar construction quality, condition and neighborhood
  • (**) Including 25% Down Payment, + 1.5% Closing Costs and 1% Rehab
You can easily see that, in general, the more doors you invest in, the better the ROI, and the more you leverage your initial investment.

8. College Funding

The best thing to do is to start early. That’s usually hard for most people who are many years away from retirement and may not even have a family yet. But the advantages are enormous. Real estate typically appreciates at a higher rate than most savings plans. That plus equity growth by positive cash flow accumulation and principle repayment over time can build a great nest egg for your children or grandchildren.

9. Early Retirement

It used to be what everybody looks forward to. Now, many people are working well past traditional retirement age. If you find something that you love, you are successful at, or just need to keep doing for any reason, then go for it!

However, there will come a time when you will want to cut back, and maybe not be active in a work situation. When that happens, wouldn’t it be wonderful to have equity built up that you could tap? Our equity gain models help you figure out where you will be in 5, 10, 15 or 20 years. Residential real estate investing can get you where you want to be, when you want to be there.


10. Legacy

What better way to leave something to your heirs, or even just to get family members started in real estate investing? Share the investment, share the rewards, then let them build their own real estate empire.



Let Us Help

Feel free to contact us to get started on your path to real estate investing success.

We'll be glad to answer any questions you may have about residential income properties,

and guide you every step of the way:


(562) 208-9818

info@re124.com

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