Why Real Estate?
The rental real estate business has some unique characteristics that can enhance its investment potential, when compared with other alternatives.
Appreciation — Real estate generally appreciates in value. My wife and I purchased our first personal residence in 1970 for $21,000. Today the same house, 36 years later, has a market value of over $100,000. That’s nearly an 8 percent annualized return on the purchase price.
Leverage — Most investments, such as stocks, bonds, mutual funds, etc. are purchased at 100 percent of market value. However, as an example, a real estate investor with a down payment of 10 percent is able to purchase and control an asset with a market value 10 times the initial investment.
Market imperfections — Markets like the stock exchanges are considered near perfect markets because any investor can know the value of any listed stock at any time. However, in the real estate market, two similar houses in the same area can have very different selling prices because of factors such as the seller’s motivation, timing, etc.
Other People’s Money — If structured and managed properly, tenants, through their rent, will pay the ongoing mortgage and maintenance expenses associated with a rental property.
Tax Laws — Federal income tax laws continue to favor real estate investments. For rental real estate, all expenses are deductible from related income. Additionally, an expense deduction can be taken for depreciation of the structure, even while the market value of the property may be appreciating. The tax implications of real estate investing are somewhat complex and I would recommend that you consult with your tax advisor for specific information.
For those interested in getting involved in the rental real estate business, I would offer the following lessons learned from my experiences.
Educate Yourself — Before buying any property, go to the library and read about 20 books on real estate investing. Buy books and tapes on the subject and talk with other investors about their experiences.
Focus on a Market Area — Pick an area that you want to invest in and look at 20 to 30 houses in that area before making a serious offer. By doing so, you will learn the neighborhood, property market values, rents, types of tenants, etc.
Small is good — Although I owned 20-40 unit apartment buildings, my most profitable investments were in 1-4 unit properties. There are a limited number of buyers for large properties and they are professional investors, looking to buy at wholesale prices. Also, in today’s energy environment, I would not buy properties with central heating systems.
Insulate yourself — Have separate checking and bookkeeping systems for your real estate business and personal accounts. Additionally, have a separate phone line for use with tenants and prospective buyers and sellers. Finally, make sure you have adequate property and liability insurance.
Real estate investing, even with all of its benefits, is not for everyone. It is a hands-on investment, requires a broad set of skills and working with tenants is a continuing challenge. However, for those with a little money to invest and a lot of sweat equity, real estate investing can be a real game changer.
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