This article has been written to provide a novice person considering real estate investing some fundamental concepts to consider as you commit yourself to this area of interest. Like all new endeavors explored, it will be to your advantage to have some basic knowledge on the particular topic before you can truly appreciate if this is right for you.
What Are The Financial Benefits Of Investing In Real Estate?
There are various opportunities that will financially benefit you by investing in real estate. Based upon your current financial condition and future investment goals, there are many factors that must be considered when selecting both a business model as well as a specific project. The following section will provide an overview on the significant financial benefits that are achievable when you invest in real estate.
Although predicting future appreciation with great certainty is not feasible, by looking at specific economic indicators can assist the Real Estate Investor in understanding future trends with regards to property value and possible appreciation. Some of these key indicators are as follows:
Job growth is a key contributor in establishing possible future appreciation. As Primary jobs (those jobs that export products outside of the local area like the car makers of Detroit) increase, the need for Secondary jobs will also increase by 2-3 times the number of Primary jobs. Secondary jobs provide services to the people performing the Primary jobs. Examples of secondary jobs include the following:
Retail store workers
Local trades (plumbers, electricians, builders, etc.)
Demographic trends are another factor to consider when trying to determine if an area has the potential for future appreciation. Demographic research will provide data on the general population of an area which includes the following:
Owners verses renters
Another factor that can affect the appreciation of an area is any revitalization initiatives the local government is undertaking. Revitalization can include the following:
Improvements of roads and transportation
Condemning and removing abandoned houses and buildings
Tax credit, grants, and loans to developers and Investors to come into the area as well as programs to help keep the current employers from moving away.
Economic development offices from the local government are typically responsible for implementing and managing the revitalization efforts.
Another aspect of how to financially benefit from real estate investing is through the creation of cash flow. Although there are many factors that are taken into consideration that derives your cash flow, simply put, it is the amount of money left over for you after all of the expenses have been paid.
The term cash flow is usually associated with properties that you are holding and generating income from rental units or homes. The great thing about creating a cash flow stream is that it will typically continue whether you stay in bed all day or off on a vacation. However, sustaining this cash flow will take some effort on your part and may include the following:
Maintaining the property
Managing the existing tenants
Keeping the property occupied
Managing property management companies
Property equity is the difference between the fair market value of the property and the sum of all of the loans against the property. For example, if a property is worth $250,000 and there is a first and second mortgage totaling $200,000, the property has $50,000 in equity. Having equity in your property is essential in order to have a cushion in the event the market exhibits declining value during the time you are holding the property. By utilizing strategies like a refinance or Line of Credit, it will allow you to pull this equity out of the property and use it as you see fit including a return of your initial investment or to leverage this capital to purchase another property. Although having strong cash flow with your properties is vital during your hold times, this income stream will disappear if you ever need to sell the property. Ultimately, it is the equity in your properties that will help set the stage for your long-term wealth creation and financial security.
In addition to the benefits mentioned above, there are outstanding tax incentives that the real estate investor can benefit from, they include the following:
Depreciation of the actual property and any capital equipment that may be utilized in your business.
Deductions resulting from expenses from owning and managing the property the property as well as business expenses you may incur.
IRC 1031 exchanges, this is a powerful tax strategy that will allow you to leverage Capital Gains taxes that you would normally pay on the sale of an investment property and defer paying those taxes by purchasing a “Like-kind” replacement property with the full proceeds you received from the sale.
Why Do You Want To Invest In Real Estate?
It will be important for you to understand what reason(s) have motivated you to be interested and involved with real estate investing. Over the years, I have spoken to many new Investors on this subject and I have boiled it down to the following reasons:
Supplement Your Current Income
There are some people who are looking at just supplementing their current income without the intention of leaving their current profession and look at real estate investing as their second job. The Investor’s that fall into this group are fortunate because they are not relying solely on real estate investing as their primary source of income, this will be very beneficial during the time you are developing you real estate skill set and investment portfolio.
Take Control of Your Financial Future
Based upon the many years of speaking with Real Estate Investors, perhaps the most compelling reasons people consider real estate investing is the ability for you to have a significant influence of your financial security and for you to control the level of income you would like to receive.
Create a Retirement Plan for Yourself
Using real estate investing as a vehicle to establish or augment a retirement plan is another common motivator I hear frequently from new investors. It is understandable that when economic conditions include downsizing, cost of living increases, and the fear of Social Security meltdown, people are concerned about having an adequate financial foundation to sustain them during their retirement phase of life.
Critical Things to Consider Before Considering Real Estate Investing
Investing in real estate is certainly not for everyone and it will be important for you to honestly assess if this is the right path for you. The following section will provide some basic questions you should ask yourself as you evaluate the feasibility of becoming involved as a Real Estate Investor.
How Much Time Will You Have To Dedicate Towards Real Estate Investing?
As we all know, you can’t create anymore time; there can only be 24 hours in a day. As you consider real estate investing, you will need to be realistic with regards to how much time you will have to devote to this endeavor. With today’s fast paced society that requires multiple income sources combined with the commitments you may already have with your family, many people can be left with little or no time to devote towards their real estate investing goals.
Are You Able To Motivate Yourself And Have The Discipline Required To Succeed?
Having the desire to be a successful Real Estate Investor is only part of the equation for ultimate success. Along with the desire to succeed comes the need for you to be able to motivate and discipline yourself. Real estate investing is certainly not for everyone despite the late
Carl Schiovone has been actively involved in real estate investing for nearly 30 years. As the co-founder of Cypress Investment Properties, he specializes in the acquisition, rehabilitation, and property management of residential properties. Carl has lectured on various investment topics to numerous investment organizations and is currently working on publishing a series of real estate investment textbooks.