For novice and veteran investors alike, anxiety is part of any investment. Quite often, as soon as you make a significant investment, buyer’s remorse can set into your mind. Questions start buzzing around in your head like, “Should I have put money into this?” “Did I do enough research?” “Will a hiccup in the economy affect the investment?” “Am I going to give all of my gains back in taxes?” We all have our misgivings in the beginning, and sometimes circumstances, as time progresses, brings stress over an investment up to dangerous levels.
No investment is without risk, and real estate is no exception. However, compared to many forms of investments, the potential risks inherent in real estate are minimal. I want to go over several common elements of investments with you and how real estate responds to them.
Predictability is something we would all like to have with an investment. Relatively speaking, real estate has predictable cash flow. All factors relative to cash flow are projected before your investment, with typical cash flow projection adjustment after one year of operations. In most cases, cash flow projections are within range and produce returns exceeding 20 percent.
Financing isn’t available in a stock trade, especially when it’s a hot stock, and you want to leverage your bet. In today’s world, hard money finance is very prevalent, very competitive, and easy to obtain in real estate. You can receive non-recourse money with low credit, where interest is paid at sale, and interest loan rates are below 10 percent in many states. Based on the never-ending need for housing, permanent finance on residential properties is relatively easy, as well.
You have control of your real estate investment. If you invest in the stock market, you typically need to hire a broker to handle your trades. Doing it on your own requires a full-time effort. This is much less the case in real estate. Once you close on the property, you own the asset and have complete control over it. That’s a powerful statement, especially when you know that you can influence both value and cash flow.
Your hard-earned money and savings are basically placed into your house like a savings bank account. Most people purchase real estate with a small down payment and then typically pay the balance of the money owed by way of a mortgage. Over time, the principal amount of the mortgage is paid down. The reduction in principal is directly proportional to the increase in and building of your savings—your equity deposit—like a bank account. However, it is at a much higher rate of return.
You can’t improve stock or a bond, but you can expand real estate and add value to your investments. Families do this all the time with kitchen and bath renovations, new siding and windows, or dressing up the landscaping. Whether the repairs are structural or cosmetic, do-it-yourself, or hiring someone, the principle is the same: You can make your real estate worth more by improving it.
Prices can be negotiated. Real estate prices range and vary by location. They are always negotiable to several terms, including the price. On the opposite side of the spectrum, in the stock market, you are limited to buying shares at market rate at that time of purchase. There is no haggling.
One of the ongoing debates in real estate investing has been whether you should invest in real estate for cash flow or appreciation. US Census data shows that new homes increased in value by 5.4 percent annually from 1963 to 2008. Appreciation and tax structure are vital factors to make deals work. My friend made millions of dollars in a real estate area, with only a 2 percent return cash flow rate and a 20 percent forecasted appreciation. Even though there was limited cash flow, the liquidation was quite impressive. Eureka!
If managed correctly, real estate acts as a savings plan. You must put money down—called your “equity”—which is identical to putting money into a savings account. As you pay down the mortgage, the equity value goes up, and you are essentially saving money every month by design, which aligns with every retirement plan.
There are various tax benefits. You get the best of both worlds with deductions off properties such as capital expenditure, maintenance, improvements, and even the interest paid on the mortgage and personal expense benefits. These deductions and expense benefits offset income and reduce your overall taxes. This type of structure is the first step toward many advantages you will continue to have in real estate.
It is good to look more closely at these real estate benefits I mention and how they compare to your current investments or something you are looking to try. It is essential to make sure you compare apples to apples when weighing the different options when exploring investment opportunities. Only then can you ensure that you are making the right decision for yourself.