REASON #9 - Real Estate is a Tangible Physical Good & Asset
What does that mean? Real estate is not some cerebral investment that is traded by the click of a button on an online brokerage. With real estate, you can hop into your car, drive to your property, walk around, inspect the buildings, and question your staff. Because of this, is is not subject to the volatility of stocks and bonds, or other investments.
With other types of investments, change can happen fast. We all saw this in the 2008 banking melt-down, when the majority of American's lost their investments on paper, right before their very eyes. When it comes to stocks, you are basically at the mercy of the company's public relations department. Which means, you have to just sit back and wait for them to publish their earnings. If the company had a poor quarter, then your stock will typically drop fast with little or no warning. All you can do at that point, is react, but this usually doesn't happen without losing a substantial sum first.
With real estate, it's different. While real estate can still have it's ups and downs, real estate for the most part is slower to react to sudden changes. If you are paying attention and know what to look for, you can see market trends way before they happen, and this allows you time to react or formulate a plan to either cut-back, sell or exchange. Maximizing your return on investment, or your cash-on-cash return, is essentially the key.
Additionally, real estate is not as liquid as other investments. That means that it is not a quick buy-and-sell transaction like stock. When you sell liquid investments, you earn cash quickly, therefore you are taxed at a very high capital gains rate. With real estate, gains are realized at a much slower rate, which makes your tax exposure significantly less, compared to other investments.
Reason #8 - Hedge Against Inflation
For most people, they may feel that the most practical thing to do, is take your money and put it into a savings bond or bank account that yields 2 to 3 percent per year. The main argument here is that this type of investing, is what most people consider "safe", or at least safer than other types of investments. The problem with this type of thinking, is that you don't make any money. This is because of one word, inflation.
Inflation is the price of goods on things like cars, food, clothes, and so forth measured against a standard of ability to purchase those goods. For example, the price of gas has basically risen fairly heavy recently. Of course, this depends on where you live, but for most people there has been at least a $2 to $3 increase in just over one year. Really when you think about it, that's a 50 percent increase! Did your salary at work increase by 50 percent? What this means, is you have less purchasing power when it comes to gas, than I did a year ago. This is because your dollar doesn't buy as much gas as it used to.
Now you may feel that using gas is a fairly extreme example, but it drives home an important point - that the price for consumer goods has consistently risen at a fairly consistent rate. To put it simply, you are actually losing your wealth because inflation is higher than your returns. Any gain in interest is wiped out by the rising cost of living. You are not becoming wealthier, you are just maintaining.
Another important fact to consider is that only time inflation was negative over the last century was during the Great Depression. If you factor that out, inflation has historically risen by 4.1 percent per year. Which means, if you have your money in a savings account earning 3% interest per year, you are actually losing money. Because the cost of good is growing faster than the value of your money.
The beauty of real estate is that it is a tangible asset (rent is a tangible asset, much like gas, food, and clothing). What does that mean? It means that your tangible goods (i.e rent), will rise at the rate of inflation or much higher, just like other tangible consumer goods. Historically real estate has risen at 6 percent per year - a full 2 to 3 percent higher than inflation. And that is just appreciation. That doesn't take into consideration the cash flow you generated from a real estate investment, nor the tax advantages, depreciation, and tax-deductible mortgage interest. So, do you still think that real estate is an "unsafe" investment?
Often times, even real estate investments that perform poorly will still perform better than what many people consider a "safe" investment (i.e. bonds, stocks or mutual funds).
REASON #7 - Asset Protection
There are a number of ways to legally protect your real estate investment that cannot be utilized with other standard investments. For instance, with stocks and bonds, if the company that you have invested with, has a bad year, then you are simply out of luck.
Property insurance is often a big cost in real estate investments, but is often covered by your property's income. It is essentially free to you, since it is often considered an operational cost of the property, and therefore can be a tax-deductible expense depending on where you live.
Insurance is one of life's necessities that go beyond the realm of real estate investing. Most people don't think about the fact, that real estate is one of the few investments that you can insure. When you invest in real estate (and you have insurance), you have the peace of mind, knowing that if your real investment is destroyed, you are covered for any losses. Given the fact that you carry the proper amount of insurance, you should be able to claim your losses for the actual value of the asset before the loss, and during the loss.
Another legal advantage of real estate investing, is that you can take ownership of this investment in the name of an LLC, or a legal corporation (such as an IBC - International Business Corporation). Holding ownership to your real estate asset in a legal corporation, allows you to protect your personal wealth by individualizing and protecting your asset as well. If for any reason, you were to be sued, your other personal assets (such as,) your house, bank accounts, and investments, would be protected because they wouldn't be property of your legal corporation.
Each and every property that you buy should be placed in its own IBC or individual corporation. That is one of the greatest ways to protect your wealth. Imagine you own multiple investment properties and one of your residents fell in the shower and became injured. If all of your properties were under a single entity (the same legal corporation), then that resident would have the legal right to pursue damages based on the entire asset value of all your investments in that entity. If, however, each property was its own legal entity, that resident should only be able to seek damages from that entity. Your other holdings would not be affected.
In addition to the legal protections that an IBC (International Business Corporation), provides, there are also many other distinct advantages, that may be available to you. Since each person has a unique circumstance, I cannot cover all scenarios in this short blog insert. I therefore recommend contacting me directly for a one-on-one personal consultation. I will be happy to assist you in becoming more knowledgeable about how to protect your assets, and what advantages may be available to you.
One of the ways to find a great investment, is to research. This can be done in a number of ways. First, find yourself a top real estate agent. One that has a dynamic reputation, who excels in their knowledge on their market area and has a proven tract record.
LEVEL ONE RESEARCH (Gathering Your Information): Research can begin in a number of ways. As with any endeavor, finding the right people is your key to success. Start by researching who is top in their game. Chances are, a top real estate agent, didn't get there with only a passive knowledge of their subject. Spend some time finding that top agent, and this will open up many doors for you as to finding the right property. A top real estate agent, can help educate you on what you can expect for certain price ranges, they can help you with investment counseling and income rental projections. Understand what you want, and where best to find it. This is the time to gather as much data as you possibly can about what you are looking for. This may be the time to put together a list of things you are looking for in your investment. It is a time to study your market areas, so you understand where the best investment deals can be found. Then an experience real estate agent can help guide you in the right direction. Gather your data, know what you want, find the right real estate agent.
LEVEL TWO RESEARCH (Selecting Your Team of Experts): This is the time when you can hit the ground running. You may travel to your proposed market destination and meet with your team area experts. This is the time where the research you have done, goes into action. This is when you look at the financial sheets, review the property data, and tour various properties.
LEVEL THREE RESEARCH (Making Your Decision): Once you have gathered all your information, and seen the market that you are interested in - you then to start narrowing down which properties meet your investment criteria. This is when an experienced real estate agent can (be worth their weight in gold), they can help point out positives and negatives about various investment properties. Thus helping you to avoid common pitfalls that many others make. Often this real estate expert will have information that will help you, which often compliments your own research data. They may have additional things to consider, points to share, dangers to avoid, before you ultimately make your final decision. A second pair of experienced eyes is always a good idea before signing on the dotted line.
REASON #6 - Refinance
Another advantage of real estate over other investments is the ability to withdraw cash from a property by refinancing. This, too, in most cases is a tax-free transaction. When you refinance a property, you are restructuring your existing mortgage debt - based on the added value your property will receive by adding amenities, improvements and/or services.
In almost every instance, it may be best to refinance a property, rather than to sell it. Let's discuss why.
Take for example a senior housing property, purchased for $9 million (with bank financing at $7.2 million). In reviewing the property prior to purchase, it was noted that by adding a few premium amenities to the first floor, this would create a higher occupancy level for the entire property. One such example of a premium amenity, was adding a 26-passenger shuttle bus, (for in house residents), to use coming and going to various popular destinations. In the first year alone, this improvement increased the value of the property by $910,000.00.
By adding a few of these premium base amenities, this in turn increased occupancy. When you increase occupancy, this increases cash flow. When you increase cash flow, you increase returns for investors. But where do you get the money to accomplish these improvements? From refinancing your investment and leveraging.
Within five years, this property almost doubled in value. The property is now more in a position to cover the higher mortgage payment, and best of all, the money from the refinancing is typically all tax-free.
So rather than perhaps selling your investment, refinancing and upgrading your property may be the wiser course to take. This provides you with a better competitive edge, and will ultimately result in a higher property value, increased occupancy levels, and cash flow.
REASON #5 - Depreciation
Depending on the country where you live, you may be able to take advantage of certain tax depreciation deductions, when it comes to buying real estate. This tax deduction, is usually an annual allowance for wear and tear, deterioration, or obsolescence of your real estate investment.
For the purposes of real estate investments, it's a non-operational expense that can be used to your advantage come tax time. In the United States, your depreciation is calculated as an expense, based on tables the government provides, showing you the number of years that you can depreciate your property. The depreciable years are vastly different depending on the asset. For instance, residential investment real estate is 27.5 years, while commercial real estate is 39 years. The basic equation for figuring depreciation is:
Total Asset Value (less) Land Value (divided by) Depreciable Years = Annual Depreciations
Let's discuss an example, to better illustrate this concept. Let's say a building (with land) has a value of $19.7 million. In order to estimate your depreciation, we have to first subtract the value of the land, since most governments do not consider land to be a depreciable asset. Depreciation only accounts for the building on the land, since they will lose value as they age. Let's say the estimated value of the land is $3 million. Now let's calculate your yearly depreciation based on the a government table of 27.5 years.
$19,700.00 (less) $3,000,000. (divided by) 27.5 years = $607,273
Now why is depreciation important. Remember depreciation is treated as a non-operational expense. Therefore you can take that annual depreciation of $607,273 per year, and off-set your cash flow. This is a tremendous advantage come tax time. Review the following to better grasp the concept.
$19,700,000.00 - Purchase Price
$ 3,000,000.00 - Land Value
$16,700,000.00 = Total Depreciable Value
$607,273.00 - Annual Depreciation
Now look at how that applies to a simplified property financial
$2,200,000.00 - Rental Income
$ 500,000.00 - Other Income
$2,700.000.00 - Total Income
$1,500,000.00 - Operating Expenses
$1,200,000.00 - Net Operating Income
$ 900,000.00 - Debt Service
$ 300,000.00 - Cash Flow
$ (607,273.00) - Depreciation
$ (307,273.00) - Net Income After Depreciation
Before depreciation, you would be required to pay taxes on the $300,000.00 in cash flow. Depending on your tax rate, that can be a chunk of change. But if you apply your annual depreciation to be subtracted from your cash flow, you basically end up with a $300,000 loss, instead of a $300,000. gain. This means, you don't have to pay taxes.
Money tends to produce more money - when invested right. With this example scenario, the property producing $300,000.00 per year in tax free cash flow. You are then able to use this money to leverage more investments. Each time we take advantage of our leveraged return on our money and our tax free cash flow, this allows us to steadily compound our investment potential, increasing our net worth.
Depreciation may not be applicable in all countries when trying to invest, but for those countries who do allow it - it is a serious consideration when purchasing real estate.
REASON #4 - Leverage, The Use of Other People's Money
Leverage is my favorite word, when it comes to discussing real estate investment. Leverage is about the use of other people's money. The concept is simple and powerful.
The use of other people's money, is the concept of using money generated by someone or something else. While it is true that you can leverage stocks (to some extent), there is no other application of leverage which is more powerful than the leverage found in the real estate industry.
In real estate, leverage is based on the asset itself and how much you can get a bank to loan money on this asset - whether it be 80%, 90% or 100 percent, of the total asset value. Why do banks do this? Because they can repossess the physical asset itself should you default. When buying stocks, often you can only borrow up to 50 percent of the stocks value. Not to mention, you must purchase stocks through brokerages (not banks), at high interest rates. In other words, when you buy stocks, you are taking the risk. But when you buy real estate (with a loan), the bank is taking the risk.
What's more, buying stocks is considered far riskier (than real estate), because of the volatility of the stock market. If your portfolio takes a huge dip, you still have to pay the margin, but have no asset to fall back on. Buying on margin is an investment where you can actually stand to lose more money than you invested. Where real estate on the other hand, is a physical asset that you can fall back upon, and less volatility, which is why a bank will be your partner.
So how is it that an investment in real estate with a 6% percent rate of appreciation, can be a better investment than a stock yielding a 10 percent rate of appreciation? One word: leverage.
When you leverage an investment, you reap the benefits of the appreciation on the total asset value, while only having a small percentage of your own money in the deal.
In any investment, the goal is to have the highest cash-on-cash return, or return on investment (ROI) possible. ROI is the percentage return on your investment as compared to your invested dollars. In order to determine ROI, you divide the amount earned by the original investment.
ROI = Return on Investment (divided by) Original investment
Here's an example. Let's consider that $200,000.00 property we discussed earlier. Given the fact that after thirty years the property is now worth $1,083,6768 (based on a 6% annual appreciation rate), we take the value ($1,083,678.00), divide by our original investment ($40,000.00) to find our percentage ROI, divided by the number of years we held the investment.
INVEST IN REAL ESTATE
$1,083,678. (divided by) $40,000.00 = 2.709% (divided by) 30 years = 90.3% per year
In this example, our ROI would be 90 percent. Is that not unbelievable? And that doesn't even include the cash flow generated from the property or your tax breaks! Now let's compare that return on that $40,000. invested in real estate (w/ a 6 percent annual appreciation), compared to the $40,000. invested in stocks (w/ a 10 percent annual appreciation), for the same amount of time.
If you held on to your stock for the same thirty years, and it appreciated at 10 percent per year (instead of 6 percent) for thirty years, your $40,000. of stocks would be worth $634,524. That would mean your ROI would be:
INVEST IN STOCKS OR BONDS
$634,524 (divided by) $40,000. = 1,586 percent (divided by) 30 years = 52.8% percent per year
Don't get me wrong, 1,658 percent return on your money is an awesome return on your investment - but it isn't the best return on your money - when you compare it to the return yielded from purchasing real estate.
Do you not find it amazing, that a return on a stock that produces 10 percent per year is nearly 50 percent less than a return on real estate that produces 6 percent per year? Even then, we are not taking into consideration the cash flow or the tax advantages on real estate investing - which you do not get from purchasing stocks or bonds. This is the magic of leverage, and the power of real estate. If you do your homework, more times that not, you will find markets and purchase property, where the appreciation level is well above industry averages for a given area.
REASON #3 - Appreciation
When it comes to appreciation, the old saying is true: location, location, location. But did you know that real estate, on an average appreciates approximately 6 percent per year? This means that real estate appreciates depending on where it is located. Great locations, yield great returns. Poor locations, yield poor returns. So, if the average is 6 percent, then there are areas that have lower appreciation rates, than areas that have higher ones. Let's talk about that for a second.
If you are purchasing a property that cash-flows, appreciation is just icing on the cake. Do a little bit of homework, and you will find which areas yield higher appreciation levels. For the United States, these areas are: Phoenix, Seattle, Boise, New York City, and Washington C.D. For Belize: this area is Ambergris Caye.
For the sake of discussion, lets discuss how appreciation can really benefit you. Assume for a second you are purchasing a piece of property worth $200,000.00 and you put 20 percent down (or $40,000.00) it then rents for $1,000.00 per month. Where do you think that investment will be in thirty years from now?
Here is what is so exciting about investment real estate: Over time, your property is appreciating while the resident or tenant is paying down your loan. On top of that, the rental income grows on an annual basis!
This is how the purchase of real estate can be a powerful part of your retirement. After thirty years, (average life of a mortgage), the property (at a 6% appreciation rate), is now worth $1,083,678.00. Not only is the property now paid off, it is worth $883,678.00, more than what you paid for it. Yet you only purchased it for $40,000. of your own money. Every month you receive a rental check, this check is then paying down your mortgage.
By using the bank's money; your money realized a much higher return than if you had invested it in stocks or bonds. That is called leverage, and leverage is the ultimate power offered by purchasing real estate. Appreciation grown on the "loaned" amount.
So the bank loaned amount of $160,000.00 - appreciated on an average of 6 percent per year (over 30 years), has now turned into $918,959.00! You then get to keep this added value, not the bank. All the bank receives, is the interest on the original loan amount of $160,000.00. Not to mention, depending on where you file your taxes, you may even get to write off the bank interest come tax time.
REASON #2 - Control
A unique advantage to real estate is that you can control it, unlike other investments. In other types of investments, often you give your money to a financial advisor - they then place it for you in a company's stock, a bond, or a mutual fund. What happens after that is completely out of your control.
You now no longer have the ability to make operating decisions for the company you have invested in. For the most part, you are now at the mercy of its managers. Managers you hope make good decisions. If bad decisions are made, then they can virtually ruin your portfolio - just ask the people who invested in Enron.
With these types of investments (company stock, bonds, or mutual funds), the only control you have is choosing whether to buy or to sell.
With real estate, it's different. You purchase a tangible asset and then you have the ability to control the management of it. While it is true that there are still external market conditions that affect your investment, the difference is that you have the ability to manipulate the operations of your investment and to respond to these conditions. Instead of being reactive (buying or selling), you can now be proactive.
Let me give you an example, if you are a property owner, you have the ability to control rents based on market changes. This you do, in order to maximize your potential income. I do this all the time in my company - both with properties that I own and assets I control. Each month a manager should complete a market survey. A market survey is a simple study that involves doing some homework. This can be done by reviewing your competitors websites, and by calling them, to find out what they are charging for rents, deposits and what they are offering for concessions, if anything. By gathering this data, managers are able to make market decisions by comparing their rents, deposits, and concessions - against their competitors and then adjusting accordingly.
This doesn't always mean raising or lowering rents. Remember, the goal is to maximize income. Since that is a dynamic process, that might mean lowering rents or offering an incentive. This is when the property's occupancy comes into play. If you have the highest rental rates compared to your competitors, then most potential residents will go down the road and rent from your competition. This then becomes lost potential income. The dynamics of real estate require you to keep occupancy, as well as rents, high. If lowering rents by $15.00 per month is the difference between being 95 percent occupied or being 88 percent occupied, then by all means lower your rents! Consider the following example.
$685.00 per month - 95% occupancy = $65,075.00 Rental Income
$700.00 per month - 88% occupancy = $61,600.00 Rental Income
In this example, just by lowering your rent by $15.00 per month on average, you actually gain close to $3,500.00 per month in income - that's nearly $42,000.00 per year. Lowering rents gradually can lead to higher occupancy. Based on a 6 percent capitalization rate, that is $700,000.00 ($42,000 / 6 percent) in value, all because you were on top of the market and able to make a real time proactive decision.
You have the power in real estate to control the operational performance of your asset more than any other investment. This is where investing in real estate gives you control. The capitalization rate is the net operating income divided by the purchase price, and is determined by evaluating recent sales statistics of similar properties in a given market. Your broker will be a valuable tool in determining your market's capitalization rate.
JUST REMEMBER: Capitalization Rate = Net operating Income (divided by) Purchase Price
TEN (10) ADVANTAGES TO REAL ESTATE INVESTING OVERSEAS
Investing in real estate is the ultimate return on your money. Nothing else provides the same kind of dollar for dollar returns and has the same kinds of advantages as buying real estate. Let me ask you this, if you had one million to invest, would it be better to invest in real estate or Microsoft stock? If you choose real estate, then you choose the correct answer. Here's why. Even if your real estate investment, appreciates at half the rate as the stock - you would still come out way ahead of the game. This is because a piece of real estate can allow you to leverage against it, you can receive various tax discounts or advantages and a investment piece of real estate can produce residual income or cash flow.
This concept runs pretty much contrary to mainstream thinking by most people. As consumers, the media constantly bombards us with information on why it is critical to invest in stocks, bonds, and mutual funds. But as with most people, who keep their money in various banking institutions, you are beginning to see your dollar disappear right on paper by banks, before your very eyes. Let's take a look at these ten (10) advantages to real estate investing.
REASON #1 - Cash Flow
Always purchase property that can cash flow. It may take time to find them, but it is well worth the effort. The simplest definition of positive cash flow is that you collect more revenue, usually in the form of rent, than it takes to pay for and operate the property. A big advantage of real estate over other investments is that it can produce cash flow on a monthly basis. The cash generated by a real estate investment will always be a much larger percentage cash on cash return than any other investment. The reason for this is the leverage, something we'll go into deeper later.
The beauty of cash flowing real estate property is that it can help you become financially free. Here is an exercise that I like to do. Take out a pen and a paper and write down your net monthly income after taxes and social security. Now write down every expense that you have in a given month. It might look something like this (mortgage, insurance, car payment, gas, groceries, utilities, clothing, entertainment) If you take your hand and cover up the income portion of your statement, then this is what your retirement will look like. A whole bunch of expenses with no income to offset them. To turn this process around, you have to start investing now.
At the end of every month, if you have discretionary income - what do you do with that. If you are like most people, they will purchase items that depreciate. This in turn does not help you become financially independent. If you were to take this same discretionary income (saved for one year) and use this to place as a down payment on an income producing piece of real estate that cash flows - you have just boosted your monthly income. If you soon buy enough properties that cash flow, soon your expenses will be covered by your assets alone. Each and every month, cash flow from your investments will then kick in. If you had to stop working, you would have the peace of mind now, that your investments earn enough to produce or cover your cost of living