Real Estate Investing has benefits that are not always recognized by investors.
Tyson Cross is a former Teacher turned Commercial Real Estate Broker and investor based in Portland, OR. His journey from educator to investor is a common progression for investors; awareness to action.
Invest in What You Know:
Do you understand the fundamentals of the stock market? You know you need to invest, but where? How? If you have a W2 job with an employer sponsored 401K, that may be all you do. In this options, the only control you have is the amount you put into your account and which investment fund you select. Your employer contribution and the market performance are out of your control.
Outside of your 401K, you can choose any traded stock on the exchange. What do you know about any of the companies on the stock exchange?
Now, think about real estate. It’s everywhere; big cities to rural towns. In every city, people need a home, and over time, what happens? Rent and the cost of housing go up. If you understand this, you understand the upward trend line for real estate market fundamentals. Your understanding of this makes the benefits of investing in real estate tangible.
Stocks vs Real Estate
Your 401K is essentially a savings account. Every payday, you buy shares, which over time adds up to a substantial sum. What’s not so well understood is that when you are ready to take your money out of your 401K, you have to sell shares. When you sell them, they’re gone! The remaining shares have to increase in value for you to stay even. This is out of your control.
Real Estate is not as liquid as stock. However if you keep your property for several years, you can borrow against the equity. The proceeds from the loan can be used to invest in additional properties, or taken as cash. Neither use is a taxable event.
Leverage & Control
The increase in value difference between a percent of a small number, your 401k or a big number, a leveraged asset, like real estate.
Example: If you have $100,000 saved in your 401K and the market goes up 8%, you made $8,000. Not bad.
If you purchased a property worth $500,000 using your $100,000 as a down payment, and the value goes up 5%, you made $25,000, which is more like 25% return against your $100,000 investment.
The difference between the $8,000 and the $25,000 is $17,000! This is the power of leverage.
The percentage increase or decrease in value is directly proportional to the amount you have saved. With leverage, you benefit from a large number increasing by gives you the benefit of a big asset increasing in value
The Benefits of Real Estate Investing
Real estate provides the opportunity to control an expensive asset with help from leverage, a loan. You collect rent from the residents and pay off the loan over time. Now let’s look at the benefits unique to Real Estate.
- Equity / Principal increase: As the loan balance gets paid down, the difference between the market value of your property and your declining loan balance is your growing equity.
- Cash flow; If you purchase your property right, it will cash flow from day one. This is after your operating expenses and debt service. If you maintain it and keep rents at the market rate, you will always have cash flow that keeps up with inflation.
- Appreciation; When you sell in the future, it should be for more than your purchase price. Commercial real estate value is determined by dividing the annual Net Operating Income by the market Cap Rate. You have no control over the Cap Rate, however, you have direct input regarding the NOI. If you are able to increase your NOI, you will increase the value of your property.
- Depreciation; This is a gift from the IRS. It is an amortized expense tied to the life expectancy of your building. The gift is that you do not have to actually spend the money to get the benefit. When you subtract this expense from your income, it reduces your taxable income.
There are no guarantees in life. But, for those who take action, the benefits of real estate investing include cash flow and wealth accumulation If you know why you are investing, get educated, get your mindset right, focus, and take action, and you will overcome the risk and be successful.
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