Evaluating Real Estate as an Investment Class Pt 2

The major benefits of investing in real estate include the following

  • Tax-deferred compounding of value: In real estate investing, the value of your properties appreciates at compound interest, while tax payment is deferred during your years of ownership. You don’t pay tax on this profit until you sell your property, and even then you can roll over your gain into another investment property and avoid paying taxes.
  •  Regular cash flow: If you have property that you rent out, you have money coming in every month in the form of rents. Some properties, particularly larger multiunit complexes, may have some additional sources, such as from facilities management fees.  When you own investment real estate, you should also expect to incur expenses that include your mortgage payment, property taxes, insurance, and maintenance. The interaction of the revenues coming in and the expenses going out is what tells you whether you realize positive operating profit each month.
  •  Reduced income tax bills: For income tax purposes, you also get to claim an expense that isn’t really an out-of-pocket cost — depreciation. Depreciation enables you to reduce your current income tax bill and hence increase your cash flow from a property.
  • Rate of increase of rental income versus overall expenses: Over time, your operating profit, which is subject to ordinary income tax, should rise as you increase your rental prices faster than the rate of increase for your property’s overall expenses. What follows is a simple example to show why even modest rental increases are magnified into larger operating profits and healthy returns on investment over time.

Evaluating Real Estate as an Investment

When Charles first entered the real estate field while attending university decades ago, his father, a prominent real estate investor, advised that he use his monthly income primarily to pay day-to-day living expenses and allocate money each month into long-term financial investments like real estate. This solid advice has served Charles well over the years.

For many people, a comprehensive wealth-building strategy can help with the challenges of funding future education for children and ensuring a comfortable retirement. However, this requires a lot of planning and discipline, especially where you intend to invest in real estate. Contacting an investment company and purchasing some shares of your favorite mutual fund or stock is a lot easier than acquiring your first rental property, but with a financial and real estate investment plan, a lot of patience, and the willingness to do some hard work, you should earn more profits on a well chosen real estate portfolio.

Compared with most other investments, good real estate can excel at producing current income for property owners. So in addition to the longer-term appreciation potential, you can also earn income year in and year out. Real estate is a true growth and income investment.

The stock market is a relatively liquid market where buyers and sellers can enter or leave the market quickly with broad knowledge of current pricing. In contrast, real estate assets are illiquid — it can take a relatively long time to enter or leave the real estate market. It can also be tricky to identify the right time and price to enter the market.

Real estate is also unique: A share of your favorite stock always represents the same investment; not so with real estate. This creates the opportunity to profit from pricing inefficiencies between one property and another. Also, the ability to complete a real estate transaction quickly provides an additional factor that can affect the price.

Clearly, a major reason that many people invest in real estate is for the healthy total returns (which include ongoing profits and the appreciation of the property). Real estate generates robust long-term returns because, like stocks and small business, it’s an ownership investment. By that, we mean that real estate is an asset that has the ability to produce income and profits

In the next part of this series, we will discuss the major benefits of investing in real estate. Keep an eye on this space.


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