Many people are still nervous of getting into real estate. There are various reasons for this. It seems to require a lot of technical knowledge; it can involve high financial costs; and it appears to involve a lot of hard work. These things are, of course, true. Yet right now there are more people interested in real estate investing than at any other time in history. There must be a good reason for this!
Well, there is! Several, in fact. Here are some of the benefits of getting into real estate.
1. Cash flow from property. This means the difference between your income and your expenses on that specific piece of property. Of course, this can be either negative or positive. You feel a lot better when it’s positive, but negative cash flow isn’t necessarily bad if it’s a planned part of your investment program. But be careful of the temptation to use up your whole cash flow on rapid debt reduction.
2. Appreciation in the value of a property. There are two kinds of appreciation, which we can call “external” and “internal”. “External” appreciation has nothing to do with the actual property itself but comes from economic conditions, land scarcity etc. Some people have made good deals by predicting where the next property “hotspot” will be and buying in hopes of quick appreciation – but of course, if you get it wrong, you are in trouble. “Internal” appreciation comes from improvement in the actual property itself and is easier for you to control. You can buy a piece of property in need of repair at its “as is” value, improve it and sell it on at a profit.
3. Leverage – being able to buy a piece of property by borrowing a percentage of its value. No other type of investment offers such a high degree of leverage. It is not unusual for investors to purchase a single family house by obtaining 100 percent financing – i.e. “no money down” real estate investing. This of course is very attractive if you can “flip” the property at a profit, quickly repay the loan and pocket the difference. But of course this can also be extremely risky. If the property doesn’t prove to be a good investment, you are in trouble. Never forget the loan is a loan and has to be repaid – somehow.
4. Amortizing. You have bought the property with other people’s money, but as you repay, your principal is being reduced. That means your equity – your level of ownership of the property – is being increased.
5. Tax advantages. There are several ways in which property ownership can be used for legitimate tax avoidance – though this should not be your first and foremost reason for buying the property, more a side benefit.
These are the main “tangible” benefits of property investing. There are many more – associated with the satisfaction and enjoyment, and the “residual” nature of the income as opposed to “linear” income – i.e. the money comes in even when you’re not actually working. Above all there’s the “buzz” which many claim beats the excitement of any other type of investment!
