Investing in Real Estate
Real estate is often one of the first things people think of when they consider investments. Why is real estate such a great tool for investing? Let's explore a few reasons.
You can Borrow Money to Invest
If you walked into a bank and told them you wanted to borrow $150,000 to buy stocks in a company, they may laugh at you. However, if you wanted to borrow the same amount for a rental property, they'd take you seriously. There are many reasons why a bank is willing to loan you money to invest in real estate; the main one being real estate is easier to reclaim then other investments.
Aside from the fact that banks will actually lend you money to invest, there are advantages to leveraging your money. A big reason investors leverage properties is for return on equity (ROE). Interestingly enough, the return on equity goes down as your equity goes up. For this reason, some investors will pull equity from their existing properties to invest in others. Check out my previous blog post for more information.
Each investor has their own strategies and not all investors try to maximize their ROE. Many investors enjoy seeing their equity and net worth increase.
Earning a monthly income off of your investment is one of the biggest reasons investors choose real estate. The income you receive is called cash flow. To calculate cash flow, you take the Net Operating Income (NOI) and subtract it by the Debt Service.
NOI - Debt Service = Annual Cash Flow
To see an example from Harrisonburg, read my previous blog post.
Renters Pay Down your Mortgage
We talked about how real estate is unique in it's ability to be financed. Another amazing part of real estate investment is that the tenants, then, pay down your mortgage.
It's important to realize that even if you do not make a lot of cash flow upon first investing in a rental, part of the money earned is the equity build up from your renters paying your mortgage. Furthermore, historically, the cost of living has increased overtime and will result in better cash flow in the future. This leads us to our next point: appreciation.
Real Estate Appreciation
As I just mentioned, histrionically, the cost of living goes up, which means rent and real estate purchase prices. Of course, there will be drops in the market, but the market has always recovered from these recessions.
If you hold your rental property for 30 years, your investment should be worth more than what you paid for it. You don't always need to wait 30 years. If you time the market correctly, the value of your house can increase much more quickly.
There will be costs in maintaining a house for extended periods of time. This brings us to our next point: depreciation.
Deprecation is the least commonly understood factor of real estate investment. In short, depreciation is a tax benefit to rental properties. The government understands that it costs money to maintain properties. The most common way to depreciate a property is by dividing the value of the property, not including the land, by 27 (years). The quotient is then a tax write off.
Value of Structure alone: $150,000.00
Divide by 27
So, at tax time, you would be able to reduce your taxable income by $5,555.55. This starts becoming significant when you begin to own multiple rental properties.
If you are interested in learning more or looking at options near by, call me at (540) 246-9067.
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