Benefits of Real Estate Investing, Part 2

In addition to helping you purchase assets, increase your net worth, and lower your tax rate, real estate has other benefits as well…

1. You can invest in it using leverage aka “other people’s money.” When you purchase real estate, either as a home to live in, or as an investment property, you don’t have to pay the full cost of it upfront.

   When people buy a home, they usually pay a small percentage of the cost as the “down payment” and then get a loan from the bank (i.e. a mortgage) to cover the rest. This method can be used in the investment world as well.

   For example, you can buy a home to rent out to family members or even buy an entire apartment building in your local city with the help of a loan from the bank. In fact, many investors fund a majority of their real estate deals using other people’s money (whether that’s money from the bank or money from investment groups, private funds, grants from local city governments, or small loans from family and friends).

   Experienced real estate investors raise money for the down payment from other rich people and then get a loan from the bank to cover the rest. By using other people’s money to fund the down payment and securing a loan from the bank to cover the rest, these investors get to own real estate properties even though they didn’t use any of their own money to purchase them. Quite a deal, if you ask me.

   Although they have to pay back these funds eventually, there are several investment strategies (like refinancing) that allow these investors to pay back that money much sooner while still keeping a big profit for themselves. You can do this too.

   Having the ability to use other people’s money to make a decent profit for yourself, and for them, is a pretty sweet deal.

   Investing in the stock market doesn’t really offer this kind of advantage. Banks, private funds, and wealthy businessmen are far more willing to loan you money for a real estate deal than for almost any other kind of investment.

2. You can protect your assets. As you can imagine, the more money you get the more you are going to want to protect it.

   The last thing you want is to get into a car accident or make a costly mistake on your job and have someone sue you for every dollar you’ve ever earned (yes, people do this). Thus, “asset protection” or protecting your net worth from creditors and lawsuits is an area of extreme interest for wealthy people in America. Real estate can be great for that.

   Oftentimes, when people purchase a piece of real estate with the goal of making money from it, they don’t purchase it the way you would normally think.

   Instead of having money in their checking account and simply paying for all or part of it, they set up a protection entity called an LLC. The main goal of setting up an LLC and buying the property through that LLC is that it protects the value of your investments from lawsuits.

   Thus, if someone sues you personally they cannot get any money or value that is within the LLC and if one of the tenets in your property decides to sue to the apartment that is held within the LLC, he or she is not able to get any of your personal money or net worth.

   In other words, the LLC separates your personal money from your investment money, even though you are in charge of both. In fact, many rich people and smart investors set up tons of LLCs.

   For example, they may partially own 20 houses and set up a different LLC for each home. That way, if someone sues them personally or someone sues one of their LLCs, that person cannot get any of the money in any of the other properties.

3. You have the freedom to decide how involved you want to be in the investment. You can invest in real estate “actively” and use it as a job OR you can invest in real estate “passively” in your spare time. You get to decide. It caters to everyone.

   Many of us enjoy our day jobs. We like the work we do and the impact it has on others. However, our jobs often take up a significant portion of our time and don’t leave much room for anything else, especially for those who have a spouse or kids.

   One of the things I love about real estate investing is that once you learn some investment basics, it doesn't have to take up much of your time.

   If you’re the opposite of me and you hate your day job entirely, there are other types of real estate investing that are more active and can be used to completely replace your old job.

   In other words, if you want to quit your job and instead make real estate your career, then you can invest actively. However, if you love your job and just want to use real estate as an additional stream of income then you can invest passively.

   Both types of investments make money, you just have to decide which side you are going to be on.

   Theoretically, the active investors put themselves in a better position to make more money (or use less of their own money in the deals) than the passive investors, but believe me, both types of investors walk away from the investments very happy (provided they found the right deals in the first place).

My point? In addition to things like extra monthly income, lower taxes, and appreciation, real estate offers several other benefits. It gives you the chance to invest using other people’s money which makes it less of a risk and a much lower financial burden for you. Real estate investing also has several entities, like an LLC, which will allow you to protect the money in your investment from lawsuits and creditors. Plus, there are so many different forms of real estate investing that you can choose how involved or uninvolved you want to be in a way that caters to your lifestyle and competing demands.

Tell me, are you considering real estate investing? Which advantage of real estate investing appeals to you most?

Don’t forget to subscribe below to receive the newest content :)

Benefits of Real Estate Investing, Part 1

There are several different investments you can make, but I think real estate is one of the best.

1. It allows you to buy an asset (something that goes up in value). Now I know some of you may be thinking back to the housing market crash of 2008 or the impending downturn many speculators think will happen in 2019, but hear me out.

   Even though the housing market may experience dips here and there, it always recovers. As a whole, houses, apartments, and commercial buildings increase in value over time, even when you factor in inflation.

   In 2009, studies showed that the average cost of a 3 bedroom house in my home state of Florida was around $175,000. Although prices dipped in 2012 to $125,000, they recovered soon afterwards. As of January 2019, the average price for a 3 bedroom home in Florida was around $230,000, an increase of $55,000 from 10 years ago.  

   Since houses increase in value over time, they are a great investment to have. So instead of using your money to buy liabilities like cars, clothes, and phones that decrease in value from year to year, investing in real estate allows you to buy something that increases in value.  

2. It can be used to increase your net worth through “appreciation.” For those new to real estate investing, appreciation is the fancy term used when something increases in worth. When you subtract your debts (student loans, credit card bills, and any bank loans) from your income and assets (things you own) what is left over is deemed your net worth.

   Investing in real estate gives you the chance to further increase your net worth through a principle called appreciation. In general, there are two forms of real estate appreciation, “forced” appreciation and “unforced” appreciation.

   Forced appreciation is when real estate increases in value due to circumstances you can control. Examples of this forced appreciation are when people buy rundown properties and renovate them afterwards (in an effort to increase their value) or when apartments increase the monthly rent (in order to increase their revenues).

   Unforced appreciation, on the other hand, is when real estate increases in value due to circumstances you cannot control. For example, a person may purchase a home and then 5, 10 or 15 years later he or she may realize that the home is worth significantly more than what they originally paid for it.

   Many times, the homeowners didn’t do anything special to cause the value of the home to increase besides pay their mortgage and mind their own business. The value of their home increased simply because more people were looking to buy in their area, the local economy had improved as whole, or the land on which the house was built became more valuable. Either way, the homeowner didn’t have much to do with the appreciation. It occurred do to factors he/she had no control over.

   Thus, whether it’s forced or unforced, as real estate appreciates in value your overall net worth increases as well.

3. Investing in real estate can increase your cash flow. Cash flow is what real estate investors call the money that is deposited in their bank accounts for investing in certain deals. It’s their profit or the money they get to keep after subtracting their expenses from their revenue.

   Since it typically shows up as a check or a direct deposit into one’s bank account, investors call it “cash” and since it happens periodically (every month or quarter) it “flows,” hence the term “cash flow.”

   Real estate investors usually generate cash flow by charging their tenets a monthly rent. After investors collect their rent money, they pay for any expenses or repairs, send a check to the bank to pay the monthly mortgage, and keep whatever is left as their cash flow. This cash flow ends up serving as an extra stream of income to supplement the money they already make from their day jobs. It’s a pretty sweet deal that puts more money in their pocket each month.

4. Investing in real estate can help you save money on taxes. For the most part, any time you sell something, or make money from providing a service or job, you owe the government taxes.

   The government provides several free services and protections we all benefit from (ie. firefighters, police officers, schools, national defense, social programs, etc) so when we make money, we must pay a certain percentage back to government in return.

   Technically speaking, a real estate owner is supposed to pay taxes on the profit or cash flow they collect in rent. However, not many of them do, legally.

   The reason real estate investors don’t pay taxes on this profit is because the government actually wants people to invest in real estate. It understands that citizens need a place to live and housing options can be scarce. Thus, it wants to incentivize its citizens to rent to each other.

   One way it does this is by allowing real estate investors to subtract out any real estate losses from real estate gains. The real estate loss that most investors claim on their tax returns in order to minimize the amount they pay in taxes is something called “depreciation.”

   Depreciation is the real estate concept used to describe the reality that the materials (bricks, windows, pipes, etc) used to make a home or apartment building will wear out over time and need to be replaced.

   Because of this fact, the government allows real estate investors to subtract a percentage of the real estate that “depreciates” or wears out over time from the profit they make. By the time most investors subtract out this “depreciation” they end up reporting a much lower amount in overall profit and this allows them to pay a much lower percentage of taxes than they would have otherwise.

   Plus, many good real estate investors take advantage of other government incentives, in addition to depreciation, that virtually wipe out most of the taxes they would have had to pay. In other words, real estate investors put money into deals, make a profit from those deals, and avoid paying taxes on most, if not all, of that money due to various government incentives in the tax code. If you start investing in real estate, you can begin taking advantage of some of these incentives as well.

My point? Real estate investing offers many benefits. It allows you to purchase something that increases in value and gives you the opportunity to raise your net worth through different types of appreciation. Plus, it can serve as a second stream of income by providing you with monthly cash flow. With the help of a good advisor, it can also make you eligible for government incentives that lower your tax rate.

Now that you know some of these incentives are you willing to give real estate a try? Are you more open to the idea of looking into some real estate deals?

Be sure to subscribe below to receive the newest content.