by Engelo Rumora
So, you have some money lying around and you’re looking to invest. After all, right now your money’s just sitting there, doing nothing. Luckily, you can do just that. Your options? Well, typically these range from investing in company stocks to buying government bonds. Each of these comes with a different kind of risk and different kind of return.
Most will probably be considering buying stocks or investing in mutual funds. The returns can be great, but with each fluctuation in the market, the stock prices fluctuate as well. There is no assurance that after, say, 5 years, this investment will give you a guaranteed return. But there is another way of investing money and having great returns: Real Estate.
Investing in the real estate market can be a great way of putting your money — or your little green soldiers, as I refer to them — to work. In comparison to these investment options, it presents a far better stability and more certain returns. Shelter is one of the three basic needs of human beings. No matter the state of the economy, booming or slowing down, people will always need a roof over their heads.
So, what are the benefits of investing in real estate? Well, not all real estate investing is equal, so let’s first have a look at some of the different investment vehicles that real estate has to offer.
When talking about real estate investments, it’s important to understand what kind of property you’re investing in, relative to the local market. That’s why there are property classes. For investors, a property class is an important factor, as each class has a different level of risks and a different rate of return. Properties are graded and divided into classes based on their location or neighborhood and age. There are 3 classes, which are explained in detail over here.
There are class A properties that are the most desirable and have all the bells and whistles you could want. These are newer buildings and built on prime locations with very low vacancy rates. They tend to be mostly owner occupied.
Then there’s class B. These buildings are typically a bit older than the A class properties and are less expensive to rent. Their neighborhoods are comparable to that of an A class property, though, and the properties are well maintained. These tend to be 50% investor owned and 50% owner occupied.
Finally, class C properties are properties that have a clear need for renovation and are located in less than desirable neighborhoods. These can even require an update of the entire infrastructure before they can generate cash flow. These are the highest risk out of the three and are usually in areas that are primarily owned by investors.
From an investor’s point of view, class B is the most attractive. These properties are located in proper neighborhoods and can even be scaled up to a class A or B+ property through renovation. Since these properties attract good tenants, the cash flow they generate is higher than class C and far more stable as well. Your tenants are far more likely to have a job because of the location of the property. In Toledo, Ohio for example, a class B property would be near or in the Washington Local School District, Toledo University, next to ProMedica Hospital or the General Motors Powertrain Factory.
Benefits of Investing in Real Estate
A rented out property that has been managed and maintained properly provides steady income in the form of, you guessed it, monthly rent (aka little green soldiers). Apart from this, the amount of rent for a given tenant is also not affected by any kind of slump the real estate market might be going through.
This means if you have leased your property to a tenant for two years, you’ll be getting the agreed amount of rent each month for the next two years. That’s an amount of certainty very few investments can claim. In my almost 5 year of investing in real estate, I have never see rents go down in any market. Some of my mentors who have been in the game for 25+ years and have experienced every cycle can vouch for the same.
In general, a property in a decent location and maintained properly shows an increase in its value over a certain period of time. Of course, the appreciation rate is highly dependent on the location and the market. Different areas will have different appreciation rates, and as we’ve seen in 2008, the economy can have quite a large impact on real estate prices. Still, on average, real estate prices steadily increase over the years, which makes them a pretty good investment option. Now, make sure to not count on it happening. Consider it a cherry on top of an already solid cash-flowing rental.
Tangibility & Opportunity for Value Add
Ever held a stock in your hand? You can’t. You might get a piece of paper saying you own that stock or bond, but that’s about it. While your property is generating cash flow, you still own that building. You can easily get a higher value from any sale later on by improving its appearance and functionality. Styles and trends of interiors change with fashion, and so can your property. You get to be the CEO, COO and CFO of that investment, and for the most part, the future and any profits are entirely in your control.
Federal Tax Benefits
The federal tax benefits allow you to deduct a portion of your property value from your income. Depreciation is an income tax deduction that allows a taxpayer to recover the cost of wear and tear and deterioration on an annual basis. So, while the whole of invested property generates income, only a part of the value requires you to pay taxes.
If you’re renting out your property, you’ll enjoy some additional tax benefits. As it happens, rental income is considered passive income, which means that they’re not subject to self employment taxes. In case of other investment options, tax benefits are usually not available. Disclaimer: Make sure to discuss in more detail with your trusted accountant. 🙂
Real Estate Isn’t Liquid
When you invest in stocks, you can go to sleep being a millionaire and wake up being dirt poor. Real estate is a physical and tangible thing. Because of this, it is far more stable. It isn’t as sensitive to market fluctuations like stocks and bonds. If the market crashes, you can still simply wait for the market to correct itself while your cash flow remains more or less steady.
So You’ve Found the Holy Grail!
No investment is without risk, and things can always happen. When you’re looking to get your little green soldiers to work, though, you really should consider all the consequences. Investing in the stock market can be very rewarding, but certainly comes with a lot of risk. The next best thing is to invest in hedge funds. These are basically designed to reduce the amount of risk, and as a consequence, the rate of return. You don’t have to manage your portfolio and everything is done for you, at a price. But even without all the risk, what you’re doing when you’re buying stocks is waiting for the market to rise and then sell it when it seems appropriate.
Real estate investing doesn’t make sense when you look at it like that because although value increases over time, it’s nowhere near the increase that the stock market will bring you. And that’s exactly right, but with real estate, you can have tenants, creating proper and consistent cash flow. And that’s where the value is created. You put a roof over someone’s head, and in turn they give you money. Want to sell anyway? No problem, you’ll still make a profit, especially if you decide to do some renovations and increase the value of the property by remodeling the kitchen or upgrading the bathroom.
Though the real estate market has its ups and downs, it is far more stable compared to the alternatives. That makes it one of the best investment options. By carefully selecting your team and the area, real estate is a safe and steady investment option. Its main value comes from the amount of control real estate gives you. There are no crazy market fluctuations on a day to day basis, and when you have tenants, you’ve got one of the most reliable sources of income available in the market.
What’s your favorite form of investing — and why?
Let me know with a comment!
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