Financial advisors will tell you that there are five ways that you can earn a return on any investment. In no particular order, these are:
- Cash Flow or Rate of Return
- Federal Tax Benefits
- Leverage of OPM (Other People’s Money)
- Principal Paydown
One of the wonderful things about real estate is that you can get all five! Real estate is the only investment that I know of that potentially gives you all of these advantages!
Think about it. What other investment product out there gives you the flexibility and possibility of great returns like real estate does?
Let’s look at each one a little bit closer.
The Five Financial Benefits of Real Estate Investments
- Cash Flow– This one is my personal favorite. It is how I make a living. Cash flow is what is left over after you collect the rent and pay your mortgage, taxes, insurance and any repairs. It is your profit. Imagine a cash flow of $150 on a rental house. Now imagine owning 20 of them. Real estate investing allows you to quickly build up a nice income.
- Federal Tax Benefits– Depreciation is an amazing thing. The feds allow you to depreciate, or deduct a portion of your property value from your income. If you have enough depreciation and work full time as a real estate professional, this can be an amazing benefit. Plus, rental income is considered passive income and therefore not subject to self employment taxes. Want to reduce your tax burden, get yourself some rental properties. What other investment does this for you?
- Leverage of OPM– When making real estate investments, it is very common to use other people’s money to do it. You get a mortgage and pay it back, sometimes over thirty years! You can even structure your deals so no money comes out of your pocket, yet you still get all the benefits. Imagine the average person trying to buy gold or stocks with a thirty year fixed rate loan. Not going to happen.
- Principal Paydown– When using OPM, of course you have to pay it back with interest. But with each payment you are also paying a bit of principal and getting closer and closer to owning the property free and clear. You are building up equity with each principal paydown and thus building wealth.
- Appreciation– We learned recently that real estate prices do not always go up. In fact many got burned. But over the long term, real estate is going to appreciate and go up in value. Prices will eventually rebound, perhaps not quite as feverish as they were before, but with QE1, QE2, QE3, QE Infinity, prices are bound to go back up in time. You can ride this wave by owning real estate. Plus, as a hard and tangible asset, real estate tends to protect the investor from the consequences of all of that inflating of the money supply.
So in sum, real estate is the only investment I know of that can give you all five financial benefits. It provides an income on other people’s money while giving tax breaks and increasing your balance sheet and hedging against inflation. What a deal! Get yourself some real estate today, while it is still on sale and the rates to use OPM are at historic lows! This situation will not last much longer and in five years you will look like a genius.
Till next time, happy investing!