Some economists even suggest that as long as you are disciplined and can comfortably pay for it, you should buy any investment you can. If you can finance the purchase, even better.
However, real estate is probably the only one against which you can borrow and have the asset pay itself off through rental income, EVEN as it pays YOU.
In fact, I have spoken to property owners who have managed to leverage a property two, even three times in their lifetime, by borrowing against the property they now own free and clear, to buy another.
What’s more, the income from the new property (let’s call it property B), paid with borrowed funds from say, property A, plus the income they still generate from that newly leveraged property A, can over time, pay back the loan on A from rent collections on A and B, while proving the owner with a boost in passive income. In other words, party money.
Even if you can purchase property in cash, many recommend you consider financing after the fact. Leveraging allows you to possibly, acquire two or more properties, update or fix them up and let themselves carry the burden of paying down the loans with rental income.
Over time, you would have the ability to acquire even more properties and eventually, when you are at the right stage in your life, own them all free and clear while enjoying all that income in retirement. The ultimate 401K or IRA.
Of course, you must buy right and be disciplined throughout. With every payment received in rents, you must set aside a portion every month to pay for licenses, taxes, insurance maintenance and miscellaneous repairs, improvements, etc. In short, you must budget as you would with any business.
Below, we examine some of the advantages for owning investment property and in particular, multi-family property.
When you buy a single family house or condo unit, small investors often feel they’re easy to manage. That may be true to some extend. On the other hand, consider that with a multi-family building, you only deal with one roof and/or one yard to mow, you are the board that approves tenants or how many times a year you rent your property and in one single trip, you can fumigate, inspect and have a punch list ready for your handyman, plumber and/or electrician to take care of, minimizing headaches.
2. Lower Taxes
There are several tax incentives for real estate investors. If you are employed, deductions from real estate investments may be used to offset wage income. In addition, there are a number of tax breaks for real estate investment which often allow property owners to turn a loss into a profit. Deductions can include any actual costs involved in financing, managing and operating the property, to include maintenance, repairs, property management fees, travel, advertising, and utilities. In addition, the IRS allows a depreciation deduction that accounts for a portion of the building (not the land portion of the property) over time, usually some 27 years.
3. Cash Flow
A property can generate negative or positive cash flow. Cash flow simply refers to the amount of money that flows in and out in pursuit of maintaining a property. Rents are an example of cash flowing in while taxes and insurance must be paid out, typically from a portion of the rents received. When the amount of income received exceeds the payments, it is said you have a positive cash flow. There are times when the amount of payments exceed your income and in these cases, you are said to have a negative cash flow. Regardless, when it comes to real estate investment, there are two more important concepts involved: pre-tax and after-tax. A pre-tax positive cash flow for instance, may also be said to occur when income received is greater than expenses before taxes are paid. However, even if your are experiencing a negative cash flow, you may end up with an after-tax positive income when your expenses are more than your collected income, but the tax breaks bring you back in the black. Depreciation can often help turn a negative into a positive.
4. Use Leverage
An old rule of thumb in real estate is to never spend a dime on your real estate investment unless you have to and/or unless it will save you money. Leverage is an important aspect of saving money through real estate investment because a real estate investor uses leverage to increase their assets without spending their own money. By taking advantage of your equity, you also improve your return on equity and it provides you with tax-free funds to help fund your next deal or improve the value of your existing property by making updates, upgrades or repairs that entice tenants (to come in or stay) and should allow you to raise rents and improve your bottom line.
5. Equity Growth
The best way to save money and earn money, is to build up equity from real estate investments. That way, with high equity you are able to save on your mortgage while earning a nice chunk of profit. However, idle equity is like idle funds in the bank. Ideally, you are always utilizing your equity to improve the value of the property and/or pursuing and acquiring new opportunities. Often, selling is a great way to take advantage of existing equity, which would allow you to reposition yourself in a potentially better property with better opportunities. For instance, you may own a building sitting on prime land which may allow you to build a much larger structure for more potential. However, you are not a builder and you’re not in the mood to start. Even if that property is making money, selling it may bring enough to allow you to purchase a more suitable property or properties.
6. The Benefits of Inflation
Generally speaking, inflation can help you save money on your real estate investment because as rent increases, your mortgage costs will remain static (assuming it is a fix-rate loan), which means you will improve your position with the increased cash flow from the rent and equity growth. Although inflation is quite low these days, there is a typical amount of appreciation properties experience as a result of even low inflation, which adds to your equity without a single penny out of pocket.
Of course, it is not all rosey with real estate investing. There are a LOT of factors that deter people from getting involved. It is scary, you could lose a lot if you engage from an emotional standpoint and there are headaches and horror stories borne from bad tenant situations to fill a few books.
Regardless, I reiterate that if you buy properly, budget properly and stay involved, you may never have to worry about money when it counts – throughout the live of the property and during your retirement. What could be more beautiful than that?
Most real estate professionals can help a buyer or seller make the right buy or sell decisions. Obviously, as you would listen to a quality attorney, doctor or accountant, listening to a quality real estate professional’s valuable information will go a long way in helping you achieve your buying or selling goal. Budgeting however, is a function of habit and here again, you must proactively seek qualified, quality, professional advise.