Young investors normally think about capital value rise and older investors normally want income generation. What is interesting with real estate property is that it fits both categories. We see both highly experienced and beginner investors look at the real estate market for opportunities. This can be a surprise for many but Greg Lindae shares why the highly experienced investors actually prefer real estate over other investment options.
A big benefit of investing in real estate property over other options is the possibility to generate a passive income. All experienced investors think about net income. The real estate agents quote gross yield figures like annual rent as property price percentage. Something like this is a really good indicator of potential ROI, however the good investors normally prefer to focus on net income or net yield. Positive cash-flow needs to be present or the investment quickly becomes a liability. Property investment poses a challenge in minimizing down payment while generating a positive cash flow every single month.
Rental homes are depreciable assets, like factory machinery or cars. Rental properties that have positive cash flow can actually show accounting losses. This offers tax deductions. Depreciation is just accounting loss and appears just on paper. Because of this you can end up with a small profit that comes from lack of tax losses. On paper you do lose money but on a month-by-month basis you would make a profit.
The asset you invest in appreciates in value as time passes. In many situations the largest ROI return in real estate comes from asset value appreciation, together with equity results. Property prices will sometimes reduce because of demand changes and other factors but in the long term appreciation is a huge benefit.
Expenses And Equity Build Up
When you pay down mortgage loan principle you gradually build up property equity stake. Although property value might not increase as you repay the loan, the asset can easily still end up with an equity increase of 100% when the term of the mortgage loan ends. Tax liability is also reduced since various property management fees like insurance, maintenance and mortgage interest can be deducted from rental income.
Leverage practically means using a part of the money, a small part, to control large value assets. In real estate we have the unique advantage that you can borrow up to 90% of asset purchase price. You practically leverage OPM (Other People’s Money). When you fully utilize and understand property investing characteristics you easily manage to build wealth in a short period of time.
The bottom line is that real estate investment is something you want to take into account when you have an available investment budget. There are so many different options you can take into account, some perfect for beginners while others are recommended for professionals. With proper research you can so easily end up making a lot of money while not exposing yourself to the high risks of other investment opportunities available now.