Real estate is one of the most uniquely beneficial investment vehicles available and also one of the safest investments you can make. You don’t hear of very many real estate investors going bankrupt. How come? The real estate market moves slowly and because it moves slowly it gives you the time to protect yourself against adverse markets.
We have all heard of the story of the stock investor who had a significant portion of his savings in one or a couple of stocks. He goes on vacation and comes back to find that the company he owns stock in has had some scandal which tank the stock price and his investment while he was away, Enron or Worldcom anyone…
Can this happen with a real estate investment? Yes, but only due to an unexpected event, usually climactic or geographic catastrophe…earthquakes, floods, etc. Real estate typically rebounds from these events quickly however. For the most part, real estate moves with the economy of the geographic area it is located in. For example, Southern California which has had a pretty consistent appreciation of around 7% over the last 40 years including the three or four down periods continues to build less new homes than people moving into the area, simple supply and demand. If there isn’t enough property inventory to meet the demand prices move up. As a real estate investor, can you see what the supply and demand looks like? Sure. Just ask you local Realtor for a report on active inventory vs. sold inventory and the average days on the market. This is usually a pretty good indicator.
Key Benefits of Investing in Real Estate
- Predictability – Real Estate is predictable and the market moves slowly enough that you can protect your investment.
- Cash Flow – The difference between your income and your expenses. Cash flow comes in two varieties, negative and positive. If you are a high income earner and need a greater tax deduction, negative maybe your choice. Most of us prefer a positive cash flow. A positive cash flow property is referred to as “mature.”
- Leverage – The ability to borrow a percentage of the value of the property. Also, the ability to purchase the property using mostly borrowed money. Only in a real estate investment can you buy a $500,000 property using none of your own money.
- Appreciation – The increase in value of the property due to either economic conditions or market conditions.
- Amortization – the ability to pay off the property over a long period of time. The percentage borrowed against the property directly effects the Cash Flow of the property. The more equity you have, the more monthly cash you have.
- Tax Benefits – The US tax code was written to encourage real estate ownership including 1031 exchanges, depreciation and general expenses. Real estate is one of the best tax shelters available.