Investors Corner
Real Estate, The best investment for thousands of years
"Buy land" somebody once said, "They are not making any more of the stuff". From earliest recorded history to the present, real estate has been the basis of wealthy and financial security.
There are three fundamental reasons for the enduring strength of real estate.
First, real estate has proven to be stable investment, not usually subject to rapid deterioration, technical obsolescence, or violent price changes.
Second, regardless of the economy, real estate maintains a reliable hedge against inflation, traditionally outstanding other rising prices.
Third, increasing population drove more and more people to compete each year for available homes, apartments, offices, and land, making real estate and even more attractive investment for the future.
This last reason is the most compelling to real estate investors, making residential housing one of the 20th Century’s most profitable investments. Rising prices and financing costs are driving many younger buyers out of the home ownership market. Even young professionals are postponing home purchases until they can accumulate down payments. The result is a demand for rental property that is strong and growing.
The benefits of investing in real estate
As mentioned, on other tangible asset enjoys the variety of benefit available though real property investment. Basically, real estate offers four potential benefits to today’s investors:
Cash flow: Successful real estate investments can produce income that exceeds expenses, leaving you with a reasonable return or invested capital. And this income stream may increase over time. Even if a particular piece of property does not have outstanding cash flow performance (and many initially do not), other benefits can be equally or more significant.
Equity build-up: Real estate investors build equity though the monthly payment of the principle on the loan taken to purchase the property. Considered a kind of “forced saving”, this is considered a special benefit because the principle may be entirely or practically paid with rental income potential grows, so does the price that the property can command in the marketplace.
Appreciation: Appreciation, the natural rise in property value, can result from inflation, increases in demand for the property, or improvements made to the property value, can result from inflation, increases in demand for the property, or improvement made to the property that allow higher rents. As the income potential grows, so does the price that the property can command in the marketplace.
Tax Advantage: Real estate, especially income-producing property, enjoys many tax benefits which are used to shelter the income produced by the property. Once the positive cash flow is protected, all or a potion of the remaining tax write-off may be used to shelter income from other real estate investments. Specific deductible items which off set property income include the following:
Operating Expenses: The cost of properly maintaining a piece of real estate.
Interest Payments: The interest paid on any loans against the property.
Depreciation: A “paper loss” (also known as cost recovery) which allows an investor to take an accounting deduction. Based on annual, theoretical decrease in property value, this mathematical deduction is designed to recover the original cost of an asset over a period of time, usually between 27 ½ to 31 ½ years. (Please, consult your CPA or attorney for current charges in the tax law).
How much can your afford to invest?
Before you start looking for rental properties, however, you should first examine your investment goals.
Real estate, by its very nature, is a long term investment. When you buy an income property, you will be committing your funds for an extended period, probably several years or more. So you need to decide how much cash you can afford to part with for that length of time.
Your investment begins with a down payment, usually the single largest cash outlay of your ownership. The remainder of the purchase price will be paid for with the use of borrowed funds, called leverage. The larger the down payment, the smaller the leveraged amount (and the smaller the mortgage costs).
Conversely, the smaller the down payment, the greater the leveraged amount (and the greater your mortgage costs). But this smaller down payment also increases your rate of return from a real estate investment. That is because your rate of return is calculated using a smaller initial investment.
These complex calculations can be simplified by following one general strategy, keep your "negative cash flow" (where expenses exceed income) to a minimum. Too much of a “negative cash flow” may be avoided by making sure your projected rental income will pay for most of your mortgage, taxes, insurance, and operating expenses. In such cases, include income tax savings to determine your “cash flow after taxes”.
In the final analysis, you must determine how much you can afford; keeping in mind the real estate is possibly today’s safest investment.
Finding the ideal real estate investment
A profitable real estate investment begins with purchase of the right property. But which one? Income properties today are classified in categories ranging from industrial parks, regional shopping center, and high rise office complexes-to raw land. But for individual investors, just starting out, few investments can equal the opportunities presented by basic residential rental property a duplex or triplex, a condominium, or a single family home. These properties are the key to developing a sound individual real estate investment program.
In buying an investment rental property for income and appreciation, investors need to do their homework carefully. Because the property you buy must not merely be right, it must be right for you. In the selection of income real estate, we recommended an analysis by the following criteria.
Location: It is often said that the three most important elements in the real estate are “location, location, location,” Prime location pay dividends in two ways. First, they attract quality tenants. Second, they generally appreciate faster.
When you select property, choose one that offers easy access to public transportation, schools and churches. Historically this is stable real estate which generally increases in value.
The safest area to invest in is probably your own hometown. You know its economic health as well as its growth patterns. This is a big advantage when selecting a good neighborhood for your investment. It’s also easier and more convenient for you to manage a property located near where you live.
Price Range: When buying a rental property, concrete on solid, middle income housing. That’s where you’ll find the strongest rental market.
Economics: It goes without saying that the ideal rental property is one with a positive” after tax” cash flow. Where this is not possible, you should examine the possibilities of creating” forced appreciation” though cosmetics maintenance, minor renovation, improved expense control, or higher rents.
Rent Control: In some areas of the country landlords are subjected to local laws which limit annual rent increases. If you are considering buying property in an area subjected to rent control, study the rules and regulations carefully before investing.
Your real estate “window” should include these criteria and should include these criteria and should probably include others particular to your own needs and preferences. Whatever your list of requirements is, be demanding and stick to it. There are many properties on the market; find the one that most compatible with you.
Please, count on PDG Homes, to make your next real estate investment regardless of the size or type of property. We will do the right analysis to guarantee you a positive cash flow.
We can obtain the right financing for you, at the best interest rate possible.
Call us at (954) 457-2010; toll free at 1-866-345-7700, or by fax at (305) 956-551.