Any investment is a compromise -where each investor must weigh the different levels of risk and return for any given investment. All investments are a trade-off between risk and return. An investment with a high return will have a corresponding high degree of risk. On the other hand, a “safe” investment with low risk will offer a lower return or profit.
One investor may be willing to take more of a risk in exchange for the potentially large returns, while another is more comfortable with safer, less risky investments. There is no perfect investment for all people.
The distressing truth is that only 1 out of 20 Americans is financially independent when they reach retirement. The rest are dependent on family, friends, or charities, and millions exist at the poverty level… literally waiting around to die.
Smart investing will put you in the position where someday your investments will earn more money each year than you do working at your job. At that point you can retire and do what ever you want, or continue to work and really sock away the dough – and build up some serious wealth!
Here is what some of the wealthiest Americans have said:
“Real estate is the basis for all wealth.” -Theodore Roosevelt
“Buying real estate is the best, safest way to become wealthy.” -Marshall Fields
“90% of all millionaires made it through real estate.” -Andrew Carnegie
A great investment should have the following qualities:
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Appreciation
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Leverage
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Tax Advantages
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Freedom
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Someone Else Pays For It
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Cash Flow
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Solid Asset
Let’s look at some of the advantages in more detail.
APPRECIATION - Over the past 80 years, real estate values have continually increased. There have, of course, been some periods where values decreased, but the overall trend has been nothing but up. Like anything else, the value of real estate is determined by supply and demand.
LEVERAGE - A great thing about real estate is that you can tie up a big asset with a relatively small amount of money. You can easily buy a $100,000 home with only 10% ($10,000) down payment. To illustrate the power of this, consider this example:
Suppose you bought $10,000 worth of precious metals, mutual funds, or some other investment. Let’s say that it goes up 10% for the year- not bad. Your investment is now worth $11,000. So your return is 10% of $10,000 = $1,000.
Now lets suppose that you take that same $10,000 and put it as a down payment and buy a $100,000 house. Again, let’s say that it goes up 10% for the year. Your property is now worth $110,000!
Your $10,000 investment increased by $10,000. That is a 100% return on your money (not even considering the equity build-up resulting from the constantly decreasing mortgage, cash flow, or tax advantages)!
TAX ADVANTAGES - You can deduct, as an expense, all of the interest, property taxes, insurance, repairs, inspections, and depreciation on your investment real estate- no matter how much you own. Do not confuse this with the rule for personal residences. While you can only deduct interest on up to 2 personal residences, you can write off unlimited investment interest.
The IRS also allows you to take a paper write off (depreciation). You can depreciate the structure (not the land) as if it would be worth nothing at the end of 27.5 years! Of course we all know that the property will probably be worth much, much more in 27.5 years than it is now -not less.
Nevertheless, on a 100,000 house (assuming, for example sake, the structure is worth 80% of the total) we are allowed to write off nearly $3,000 in depreciation alone each year!
FREEDOM - While there is some management and record keeping required, it is nothing compared with some other investments. If you invested in a business such as a dry cleaners or a restaurant, you would be married to the place, putting in God knows how many hours. Real estate investing can be done without too much interference with your current job.
SOMEONE ELSE PAYS FOR IT - With real estate, the people who occupy your buildings are called tenants. They pay you rent every month that you then use to pay the mortgage. The tenants literally buy your investment property for you! When you invest in stocks, bonds, or precious
CASH FLOW - Real estate provides you with a monthly cash flow. This can be some very significant income, especially after the loan is paid off!
SOLID ASSET - Real estate is widely recognized as one of the greatest assets to have. It is looked upon favorably by anyone looking at your financial statements. Real estate is also easy to borrow against should you need extra capital.
It would not be fair to have a discussion about investing in real estate without covering some of the drawbacks, no investment is "perfect".
MANAGEMENT- All real estate requires management, either by you or a professional management company. There are more headaches involved with real estate than with simply putting your money in a money market account or mutual funds. There is also more paperwork, because each house has its own mortgage, property taxes, insurance, etc. Management takes some time, but if you develop a system and stay on top of it, it is not all that hard.
VACANCY - All real estate can suffer from vacancy from time to time. With a condominium, townhouse or single family home, if it’s vacant, the whole thing is vacant. With a 20 unit apartment, if you have a vacancy you still have the other 19 units producing rental income. By purchasing the right properties in the right areas and charging fair rents, you can minimize the vacancy rate so it isn’t a big problem.
REPAIRS - Any real estate is going to require repairs occasionally. Single family homes each have their own furnaces, air conditioners, roofs, etc., unlike an apartment building. Houses may therefore have more repairs, although they will generally be less expensive repairs than for a larger building.
