IntroductionTurn on the television or scroll through Facebook, and chances are you’ll see at least one advertisement for a group or “guru” who promises to teach you how to “get rich quick” through real estate investing. The truth is, much of what they’re selling are high-risk tactics that aren’t a good fit for the average investor. However, there is a way to make steady, predictable, low-risk income through real estate investing. In this blog post, we’ll examine the tried-and-true tactics that can be used to increase your income, pay off debt … even fund your retirement! Quick Links to ContentOne of the basic principles of real estate investment lies in this fact: everyone needs a place to live. And according to the Bureau of Labor Statistics’ most recent Consumer Expenditures Survey, housing is typically an American’s largest expense.1 But there are other reasons why real estate is a great investment choice, and we’ve outlined the top five below:Why Real Estate Investing?
- Appreciation Appreciation is the increase in your property’s value over time. History has proven that over an extended period of time, the value of real estate continues to rise. That doesn’t mean recessions won’t occur. The real estate market is cyclical, and market ups and downs are natural. In fact, the U.S. housing market took a sharp downturn in 2008, and many properties took several years to recover their value. However, in the vast majority of markets, the value of real estate does grow over the long term.The S&P CoreLogic Case-Shiller National Home Price Index, which tracks U.S. residential real estate prices, released its latest results on August 29 with the headline “National Home Price Index Rises Again to All Time High.”2
Above is the last quarterly report released. Link to interactive index: S&P Case-Shiller US National Home Price IndexWhile no investment is without risk, real estate has proven again and again to be a solid choice to invest your money over the long term.
- Hedge Against Inflation Inflation is the rate at which the general cost of goods and services rises. As inflation rises, prices go up. This means the money you have in your bank account is essentially worth less because your purchasing power has decreased.Luckily, real estate prices also rise when inflation increases. That means any money you have invested in real estate will rise with (or often exceed) the rate of inflation. Therefore, real estate is a smart place to put your money to guard against inflation.
- Cash Flow One of the big benefits of investing in real estate over the stock market is its ability to provide a fairly steady and predictable monthly cash flow. That is, if you choose to rent out your investment property to a tenant, you can expect to receive a rent payment each month.If you’ve invested wisely, the rent payment should cover the debt obligation you may have on the property (i.e. mortgage), as well as any repairs and maintenance that are needed. Ideally, the monthly rental income would be great enough to leave you a little extra cash each month, as well. You could use that extra money to pay off the mortgage faster, cover your own household expenses, or save for another investment property.
- Leverage One of the unique features that sets real estate apart from other asset classes is the ability to leverage your investment. Leverage is the use of borrowed capital to increase the potential return of an investment.For example, if you purchase an investment property for $100,000, you might put 10% down ($10,000) and borrow the remaining $90,000 in the form of a mortgage.
- Even though you’ve only invested $10,000 at this point, you have the ability to earn a profit on the entire $100,000 investment. So, if the property appreciates to $120,000 – a 20% increase over the purchase price – you still only have to pay the bank back the original $90,000 (plus interest) … and you get to keep the $20,000 profit.
- That means you made $20,000 off of a $10,000 investment, essentially doubling your money, even though the market only went up by 20%! That’s the power of leverage.
- Tax Advantages One of the top reasons to invest in real estate is the tax benefit. There are numerous ways a real estate investment can save you money each year on taxes: Depreciation
- When you record your income from a rental property on your annual tax return, you get to deduct any expenses associated with the investment. This includes interest paid on the mortgage, maintenance, repairs and improvements, but it also includes something called depreciation.
- Depreciation is the theoretical loss your property suffers each year due to aging. While it’s true that as a home ages it will structurally need repairs and systems will eventually need to be replaced, we’ve also learned in this post that the value of real estate appreciates over time. So getting to claim a “loss” on your investment that is actually gaining in value makes real estate an appealing investment choice.
Types of Real Estate InvestmentsWhile there are numerous ways to invest in real estate, we’re going to focus on three primary ways average investors earn money through real estate. We touched on several of these already in the previous section.
- Remodel and Resell HGTV has countless “reality” shows featuring property flippers who make this investment strategy look easy. Commonly referred to as a “Fix and Flip,” investors purchase a property with the intention of remodeling it in a short period of time, with the hope of selling it quickly for a profit.This is a higher-risk tactic, and one for which many of the real estate “gurus” we talked about earlier claim to have the magic formula. They promise huge profits in a short amount of time. But investors need to understand the risks involved, and be prepared financially to cover additional expenses that may arise.Luckily, an experienced real estate agent can help you identify properties that may be good candidates for this type of investment strategy… and help you avoid some of the pitfalls that could derail your plans.
- Traditional Rental One of the more conservative choices for investing in real estate is to purchase a rental property. The appeal of a rental property is that you can generate cash flow to cover the expenses, while taking advantage of the property’s long-term appreciation in value, and the tax benefits of investing in real estate. It’s a win-win, and a great way for first-time investors to get started.And according to the U.S. Bureau of Labor Statistics, rents for primary residences have increased 21.9 percent between 2007 and 2015 as demand for rental units continues to grow.1
- Short-term Rental With the huge movement toward a “sharing economy,” platforms that facilitate short-term rentals, like Airbnb and HomeAway, are booming. Their popularity has spurred a growing trend toward dual-purpose vacation homes, which owners use themselves part of the year, and rent out the remainder of the time. There are also a growing number of investors purchasing single-family homes for the sole purpose of leasing them on these sites.Short-term rentals offer several benefits over traditional rentals, which many investors find attractive, including flexibility and higher profit margins. However, the most profitable properties are strategically located near popular tourist destinations. You’ll need an experienced real estate professional to help you identify the right property if you want to be successful in this highly-competitive market.
Does Real Estate Investing Sound Too Good To Be True?We’ve all heard stories, or maybe even know someone, who struck it rich with a well-timed real estate purchase. However, just like any investment strategy, a high potential for earnings often goes hand-in-hand with an increase in risk. Still, there’s substantial evidence that a well-executed real estate investment can be one of the best choices for your money. Purchasing a home to remodel and resell can be highly profitable, as long as you have a trusted team in place to complete the remodel quickly and within budget … and the financial means to carry the property for a few extra months if delays occur. Or, if you buy a house for appreciation and cash flow, you can ride through the market ups and downs without stress because you know your property value is bound to increase over time, and your expenses are covered by your rental income. In either scenario, make sure you’re working with a real estate agent who has knowledge of the investment market and can guide you through the process. While no investment is without risk, a conservative and well-planned investment in real estate can supplement your income and set you up for future financial security. If you are considering an investment in real estate, please contact us to set up a free consultation. We have experience working with all types of investors and can help you determine the best strategy to meet your investment goals. Text or Call Doug Martin 561-339-3299 or Jason Martin 561-624-4544, the Martin Group Real Estate Team at Keller Williams Realty of the Palm Beaches. Sources:
- Bureau of Labor Statistics Consumer Expenditure Survey Annual Report
- S&P Dow Jones Indices Press Release
- Durden, T. (2016 November 29). US Home Prices Rise Above July 2006 Levels, Hit New Record High [blog post] ZeroHedge
- Investopedia S&P CoreLogic Case-Shiller National Home Price Index, December 2019