8 Reasons to Begin Real Estate Investing

Buy and Hold Real Estate Investing homes

2018 has come barreling in like an arctic blast, but don’t decide to hibernate under your covers. Instead, use this time to take stock of your current financial picture.

Are you satisfied? Or do you feel ready to pursue new goals in 2018? Are you interested in earning more money and striving for better long-term investment returns?

If so, then here’s a New Year’s resolution for you:

I will make 2018 the year I begin investing in real estate

Maybe you like the sound of it, but still you wonder: “Is real estate investing for me? Is it really worth the effort?”

8 Reasons to Begin Real Estate Investing Now

 

1. Show Me the Money

Why invest in real estate? Because unlike most stocks and bonds, rental property generates a consistent stream of income. Cash will flow from the rent your tenant pays you every month. If you purchase the right rental property, you will have monthly positive net income, which is the amount of rent that you pocket after paying your operating expenses (like repairs and maintenance) and your loan costs.

So, depending on your property purchase, you can use real estate investing as a way to make more money each and every month. This income can be the basis of a lucrative side hustle, or it can be the beginning of making full-time real estate investing your home-based business. You have the flexibility and power to decide what real estate investing will be for you.

2. Leverage (that’s the “Good” Debt)

Real estate is unique because you can borrow against the value of the property in order to purchase it. Think of it this way: if you want to buy $100,000 worth of treasury bonds, you need to pay $100,000 in cash for them. But if you want to buy a rental property worth $100,000, you only need to pay $20,000 cash out of your pocket for it. You can finance the rest by borrowing the remaining $80,000.

As the value of the property increases over time, you make money not only on your initial investment, but also on the borrowed funds. This is the power of using OPM or “other people’s money.” You can grow your wealth while maintaining more of your liquid funds to invest in additional rental properties or other investments.

Leverage and OPM make real estate investing money

3. Appreciation

The value of real estate typically increases over time. This appreciation can happen anywhere, anytime, with any piece of real estate that is bought or sold. It can be moderate, as prices steadily rise in a region, or it can be explosive, with a surge of growth in local home prices. But either way, if you buy and hold a rental property, you can almost always sell it for more than the purchase price.

4. Depreciation

Depreciation is a term used by the IRS to describe the process of a building wearing out over time and losing value. But wait, didn’t we just say that real estate typically appreciates over time? Yes, we did. So if your home is gaining value, what is depreciation all about? In real estate, it’s basically just a tax deduction, which provides a huge tax advantage to all real estate investors. Depreciation is one of the reasons that you can earn more cash every year, but not necessarily pay more in taxes.

5. Other Unique Tax Advantages of Real Estate Investing

In addition to depreciation deductions, rental properties allow for other tax advantages. The costs of owning and operating rental properties are all tax-deductible. These costs include mortgage interest payments, property management, maintenance, insurance and property taxes. In addition to writing off your expenses, you can use a special IRS rule (based on Section 1031 of the Internal Revenue Code) to defer any capital gains taxes that you would owe at the time of sale based on appreciation.

Let’s face it, the tax code heavily favors real estate. It’s almost as if the President of the United States was a real estate developer. Ha!

6.  The Safety of a Tangible Asset

If you buy a stock or bond, and the company goes under, with investors fleeing for the exits, you will have an asset that has been devalued to nothing – a big fat zero. For example, one time I invested $5,000 on stocks for a drug company that was trying to get FDA approval on a new cancer fighting drug. It was supposed to be a “sure thing” according to my adviser. Instead the company failed to win the approval, ultimately ceased operations and folded. My $5,000 investment was worth nothing, absolutely $0.

Real estate on the other hand is an asset that you can touch. Heck, you can walk on the land and live in the house. And people always need somewhere to live. So even if the real estate market turns down, you will likely still have something of value. Further, even if the home is damaged, the land itself continues to hold value. Why? Because land in this world is a limited commodity, no one is making any more of it!

7. Improve Your Asset Performance with “Sweat Equity”

Increase value of rental property through renovationWith a little work (or sweat that is), you can increase the value of your rental property by renovating or remodeling it. Your renovations should make your rental home more attractive to tenants, which in turn will increase your rent. The increasing rent will increase the income you earn on the property and increase the overall value of your rental home.

I have used the sweat equity technique on almost all of my rental properties. I usually buy “fixer-uppers,” priced below market value, and then renovate the properties prior to their rental. Sometimes I have purchased a home as a primary residence, fixed up the property while living it, and then moved out to turn the home into a cash flowing rental. You can check out one example of that technique here: How to Find Financial Freedom in Your Home.

8. Inflation Hedge

Real estate is one of the best known assets for protecting yourself against future inflation. Why? Because as the economy grows and fuels inflation, property rents will increase to meet rising demand. As rental prices go up, your net income will grow and increase the value of your property.

2018 is Your Year to Get Started!

Real estate investing requires audacious action. You have to be strong and determined. It’s easy to put a little more cash into your 401K index fund – it takes much more effort to purchase a rental home. But the benefits are huge and unique, and if you don’t try real estate investing, you are missing out on one of the greatest wealth-growing strategies out there.

You can start today by reading more of my blog and subscribing to CashflowKat for helpful tips and tools. Or, you can find other free, great sources of information on the web or at the library.

Either way, get informed and get determined to make real estate investing the one New Year’s resolution that you keep in 2018!

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31 thoughts on “8 Reasons to Begin Real Estate Investing

  1. Great post Kat! My third unit was a fixer-upper and it has worked out really well for me. My problem is that I am not handy:( I try to. Yesterday I talked to my son (16) to see if he would be interested to learn how to fix basic things so he could help me manage my current units and potentially buy more. I would love that, he didn’t say no. We will see. I have been looking at triplex but it is so expensive right now plus I seem to always change my mind about whether I want to remain a landlord or not. Either way I agree it is a great way to make money. I have leveraged each purchase with the previous one. Have a nice holiday:)

    1. I like your effort to recruit your 16 year old! I have a couple of teenagers and they run for cover when I try to press them into a little DIY land-lording, ha ha, oh well. And I know sometimes the land-lord biz can get a little hairy, but boy, the asset portfolio you are building is going to bring you and your family such great rewards in the long run. Have a wonderful holiday too Caroline!

    1. Focused like a laser – except when I’m blogging about stealing McDonald’s soda in a water cup, ha ha. But no, it’s true, real estate investing can be riskier and tougher to navigate than many other forms of investing. But I’m a huge believer in the benefits, which is why I feel a bit passionate about encouraging others to get into the game. The scales really are tilted in favor of real estate owners, which is why so many wealthy people invest in it. But, the cool thing is that us little people can also reap the same benefits by finding smaller properties that we can afford and building from there.

  2. Great post Kat! Haha I didn’t mean to put down the benefits of the mortgage interest deduction in my latest post! I believe real estate is an important part of a person’s asset mix. Mrs. Widget and I own our primary residence and an investment property as well. Maybe we will look to aquire a vacation property as well in the future if all goes well.

    Love your site and the message behind it! Sounds like you have worked through a lot of adversity and come out stronger because of it!

    Have a great holiday with your kids!

    1. Thanks Mr. Widget, hope you are enjoying the holidays too! And don’t worry, I didn’t think you were putting down the mortgage interest deduction (who would dare do that??? ha ha). I thought your take on the new and ever-changing tax laws was right on target!

  3. Real estate is a great investment and you are right, it generally does increase over time. We don’t have any rental units but we do have a house and the value has gone up nicely every year.

    I’ve considered buying more property to rent out but I don’t think I really want to deal with tenants. And property managers take a hefty percentage. Still on the fence about it I guess. Thanks for the great post!

    1. You are right, property managers do not come for free and hiring management is often the difference between being cash positive vs. negative in the early years of an investment. So, it can be a decision: do you want to be a landlord or would you rather stick with REITs or other truly passive investments? I won’t lie, being a landlord has its ups and downs, but I decided the returns are worth the effort for me! Good luck in your own decision making 🙂

  4. Excellent summary! Let’s go in on a small apartment complex together this year?!? 😉

    That’s actually what my buddy who got me into rentals keeps asking me. One of these days. But for now, the 5 SFHs are plenty enough to keep me busy.

    Happy New Year, Kat!

    1. I almost partnered up years ago on a multi-family in California…and would be filthy rich now if I had, sigh. But, I have to say that the would-be-partner guy turned into a serious alcoholic train wreck over the years, so I’m actually glad not to have partnered up with him! But, yes, once you get into real estate investing it certainly gets tempting to keep growing that portfolio! Happy New Year to you as well Cubert!

  5. Hi Kat!! Great summary!

    I love how RE has forced appreciation. You can remodel whatever way you desire and the designing process can be fun!!

    That’s one advantage, you have some control at your hands to increase value but when you’re a small potato holding stocks, you have no control (though I still love holding stocks bc I do absolutely nothing).

    Haha but overall I like RE for flipping opportunities only bc I love seeing ugly properties turned into gems 🙂

    1. That’s exactly right FinSavvyPanda! Real estate takes more effort (than stock investing) but you do have more control. Also, it can be fun and rewarding to take an ugly duckling and bring out its potential…and then rent it or sell it for big bucks! 🙂

  6. The only parts I miss about having a full-time job are the 401K match and regular income. And the only reason I miss the regular income is because it qualified me for a mortgage to buy an income property. I really want to invest in real estate and I’m hoping to be able to purchase in cash. Chicago has so many great neighborhoods that are still inexpensive and ripe for growth in the next five years.

    And the pink color scheme is perfect.

  7. “Let’s face it, the tax code heavily favors real estate. It’s almost as if the President of the United States was a real estate developer.”

    You crack me up, Kat. Great post. I love real estate, but fear tenants. Can you do a future post on how to handle tenants?

    All the best in 2018. I’m sure 2018 will be very kind to you. Cheers.

    1. You are wise to be wary of tenants and property management. The human factor makes real estate investing a little more…oh….interesting….than good old stocks and bonds. But, I will say this: I have found the majority of tenants to be good people trying to do the right thing most of the time. In fact, being a landlord has made me less cynical, rather than more (no easy feat, ha ha). I have had a few tenant doozies, and I’ve written a little bit about dealing with tenant issues, but I will keep adding new posts on that topic!
      Thanks for the well wishes and all the best to the Groovies in 2018!

      1. Thanks, Kat. Looking forward to more tenant management posts. And I hear you about most people trying to be decent. I see this oddly enough in parking lots as I wait for Mrs Groovy to finish shopping. Ninety-nine percent of people contort themselves into pretzels as they exit their cars so they can avoid doing damage to any neighboring cars. It’s actually quite heartwarming to watch.

  8. This post came at the perfect time for me!

    2018 will actually be the first year my fiancee and I will be transitioning into our real estate ventures! We wont be buying any actual physcial real estate, but we will be beginning our starter home savings fund. I will also be rebalancing our portfolio and including a REIT Index Fund.

    Thanks for the share and I wish you all the best in 2018!

    1. Glad to hear it FMM! I know there is an active debate in the PF community about whether home ownership is a good “investment.” I’m a firm believer that it is. So starting a down-payment savings fund is a great goal in 2018, as is adding a REIT index fund to your investment portfolio – a good way to start dipping a toe into diversifying with real estate. All the best in 2018!

  9. That’s exciting that you have a goal that you want to achieve in 2018 and it is so specific! I was a landlord once (basement suite) and I did enjoy it but perhaps because it was so accessible (downstairs) rather than trekking it across the city to manage their issues. Good luck with finding a good rental property! So far I have some REITs instead of buying real estate as my net worth is almost 50% in real estate anyways.

  10. Hi Kat! Love reading your blog. We’re currently living in a university town. There are some really great purchasing options in the area in terms of multi unit properties (triplexes or 4 bedroom condo units each with ensuites) rented out to students. Purchase price is reasonable, especially when compared to rents, however I hear time and time again the headaches of renting to students. Dealing with high turnover (as kids graduate) and potential parties could be a high risk. What is your take on purchasing student properties?

    1. Great question, and I actually think I want to write a full post on student rentals very soon! I have two properties that have been student rentals (one duplex is currently a student rental) and I am generally a big fan. You can get good returns off student rentals. The demand is strong, and students will often have a friend who wants to take over the space when they graduate. So vacancy is not a problem. Also, students rarely request maintenance and are generally easy-going. On the flip side, they will let things get run down and possibly not report something that does need maintenance. But, over time, I have found that the good outweighs the bad, especially when you rent to older or graduate students. They are usually more serious and don’t bring the partying issues. You have to be more careful with undergrads. We had a problem with damage to our house with partying undergrads once. We were able to get full payment for the repairs from their parents because they had signed Guarantees (in addition to the students signing the leases). So, I generally say go for it! Feel free anytime to DM me with more questions and also look for a student rental post before long. Thanks for stopping by!

  11. Thanks very much for the feedback! I like that you get the parents to be guarantors. I look forward to reading your post about student rentals!

  12. I have always wanted to get into real estate investment. Now that I have finally paid off all student loans and my only debt is our own mortgage, I’m excited to start saving up to make it a goal!

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