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Real estate
creates wealth, offers benefits
Income, tax advantages,
appreciation and leverage
As a vehicle
for creating wealth, financial experts agree it's hard to beat
real estate. Of the four benefits all investors seek (income,
tax advantages, appreciation and leverage), no other single
investment offers as much as real property.
The first thing many
investors want to see is income. While there are any number of
investments that may offer this benefit, few can produce as
much income relative to the cash invested as real estate.
Rental income that exceeds a property's expenses creates a
positive cash flow for the investor. With a fixed-rate
mortgage, an investor can insulate a large part of his costs
against rising property values. Then, as rents increase so
does cash flow.
Infinite
return
How much or how little
cash an investor puts up greatly affects the yield in rental
properties. If, for example, a property has a positive cash
flow of $2,000 a year but the investor had to come up with a
$10,000 down payment to make the purchase, the return would be
20 percent per year. Not bad, but if the same cash flow could
be maintained with a $5,000 down payment, the return would be
40 percent. Using a no-money-down technique to purchase the
property could yield an infinite return.
The tax benefits of real
estate are many. Besides mortgage interest, property taxes and
a slew of other deductible business expenses, there is
depreciation, which in some cases can provide tax losses to
offset other personal income.
Property appreciation is
yet another way real estate builds wealth. The National
Association of Realtors has been tracking home prices since
1968. Home values have increased each year at an average rate
of inflation plus one to two percentage points. The longer a
property is held, the more likely an investor is to profit
from resale, unless the property was purchased at below market
value, in which case appreciation would be immediate. But
whether instant or gradual, appreciation can create fortunes.
True return
But the true return on
real estate shouldn't be measured by just income tax benefits
and appreciation. Leveraging borrowed funds gives a return far
in excess of the property's appreciation rate. An investor may
put down 10 percent on a property, but might reap an annual
return of 100 percent as a result of the price appreciation.
According to the Joint Center for Housing Studies, even a
modest 3 percent annual rise in the value of a property bought
with 10 percent down generates a 34 percent annual return on
invested capital if the property is held at least three years.
Leverage
The less an investor puts
down, the more leverage. Usually the greater the leverage, the
higher the mortgage payments, so care must be taken in
property selection and contract negotiations to be sure the
property will support the payments.
As if these benefits
aren't enough, there's one other that absolutely no other
investment provides, and that's shelter. Whether for your
family or for your tenants, when you invest in residential
real estate you are providing someone with a home.
This article is sponsored by Carleton
Sheets™, official home of NO DOWN PAYMENT™ Real Estate
Investing. Advertised on TV for nearly 20 years and already
known to millions, the Carleton Sheets NO DOWN PAYMENT Real
Estate Course has helped thousands of people achieve financial
independence.
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