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Submitted by: Dave Peniuk
Money in real estate is what the big stories are made of, and why we stick with it despite the many challenges (and we’ve seen challenges from property managers robbing rent money from us, to fire code violations leading to court appearances). But, if you’re still thinking about investing in real estate and you haven’t yet, let me tell you what the best part about owning rental properties is: You Make Money in Your Sleep! Let’s look at the advantages, and just how you can close your eyes and make money:
* The leveraging advantage;
* Powerful Return on Investment (ROI);
* Tax write-offs;
* Tangible asset class;
* Residual income/equity building; and
* Limited land supply.
Real Estate Advantage: Leverage.
In a nutshell, this refers to the idea of using OPM (other people’s money) to help purchase property. In most cases, we obtain a mortgage from a bank for upwards of 85% of the value of the property. This allows us to use less of our own money to build wealth thru appreciation, positive cash flow, and rent covering principal and interest repayment. There are not too many other investment options that allow us to invest in only 15-25% of the asset while obtaining 100% of the return.
Real Estate Advantage: ROI.
If you put down $25,000 on a $100,000 rental property, with 5% annual appreciation, approx. 2% principal payback, and 1% positive cashflow from your rent collected, that will earn you $5,000 + $2,000 + $1,000 = $8,000 in your first year. Divide this into your original down payment of $25,000, your first year ROI is 32%! Just imagine what your ROI would be if the property appreciated 10% in a year (if you guessed 52% you’d be right)!
Real Estate Advantage: Tax write-offs.
Of course, you should speak with your accountant before determining exactly what you can and can’t write-off, but there are plenty of expenses that you can write off when you own real estate. A few of these items include: interest paid on the mortgage, operating costs such as heat, hydro, insurance, property management, even some of your closing costs can be written off. In addition, your accountant may even advise you to depreciate your building which helps at tax time too!
Real Estate Advantage: Tangible asset class.
Owning a rental property is owning something tangible. You can kick it, smell it, touch it, and I suppose even taste it (not advisable but you could)! Buying 100 shares in a company is really just a paper-based asset. Financial trouble or internal turmoil are not immediately apparent to the shareholders. Did the CEO just sell all his shares? You don’t know until you read about it in the paper. Now, I am not saying not to put your money in the stock market. I proudly own shares in many different companies. I am simply saying that if you are wondering how your property is doing, go do a drive-by or ask a friend to. Order an appraisal to check it’s current market value. I love the idea that at any given time, I know what is going on in my property.
Real Estate Advantage: Making Money while you Sleep.
As the title of this article suggests, real estate allows you to build equity, and if you have positive monthly cashflow, make money even while you sleep! You don’t have to work at real estate everyday like a regular job. If you buy well and manage (or hire a property manager to manage) the property well, you will make money on it without working on it very often. Even if the market is depressed a property where the rent covers the costs still makes money even if the value has depreciated.
Real Estate Advantage: Limited land supply.
The amount of land we have on Earth is limited. It’s even more limited in all the world’s major cities. Yes, urban sprawl tends to push out cities boundaries, however, there is a limit to how far people want to live away from a city’s downtown core (or wherever the majority of workplaces are located). Because of this, land value will always increase over the long run. Supply and demand is a powerful theory especially when it comes to real estate. My parents used to live not far from where my wife and I live now. Thirty-five years ago, houses in this area were selling for a meager $20,000. Now, houses are selling for $700,000 to over $1 million! Imagine if you bought 3 houses putting $5,000 down on each 35 years ago. Your $15,000 would now be valued around $2,000,000!. How’s that for ROI?
About the Author: Dave and his wife Julie both work in real estate, and invest in rental properties on the side. After building a multi-million dollar portfolio in their spare time they started a free newsletter to help their friends, family and readers invest in real estate.
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