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 really worth the effort?”
8 Reasons Why Real Estate Investing Should Be Your New Year’s Resolution
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.
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.
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
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”
With 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!