The Basics – Real Estate Investing

What is Real Estate Investing? Traditionally many people have regarded real estate investing as investing in your own home, and making profit through selling the house after it has increased substantially (capital appreciation). This is certainly a tax advantaged approach, as the first $250,000 profit if you are single or the first $500,000 if you are married, is not taxed as capital gains, giving you huge savings. However, this is also a risky proposition, as house prices can go down as well as up, and so requires good market timing (or maybe luck). Also, the traditional average returns on house prices are commonly quoted as being around 6% a year, which is a little lower than the stock market. Also, Robert Kyosaki of Rich Dad Poor Dad fame clearly explained before the last major housing crash that your own home is a liability and is not an asset, i.e. you have to pay money to keep it, as if you don’t you will loose it, while an asset instead pays you over time.

Ignoring capital appreciation of your own home, real estate investing can occur in many profitable forms, wholesaling, flipping, buy and hold investing, etc. To learn more about these various ways of investing in Real Estate, I’ll guide you to one of my favorite blogs for this, BiggerPockets. One of the most common forms of investments is to buy investment, income producing real estate, known as a buy and hold strategy. You can do this yourself, snapping up condos, single-family homes or multi-unit properties typically with 2-4 units in them (5+ units are treated differently as investments). If you don’t have the resources to buy and investment property, you can still get in on the game, through real estate investment trusts (REITs).

The Advantages of Real Estate Investing. I would strongly lean to the owning your property yourself over owning stocks, investment trusts (although when these sectors are hot, they are good too!) as there are a multitude of advantages of owning investment real estate:

1) You have more control of your investment, and can make upgrades to your property that allow for increased value in your property when it comes to sell it or when new tenants come in to rent.

2) In terms of long-term prospects, governments can always print more money, companies can issue more stocks, and companies can lower their dividend payments, but it’s hard to create more land, so land and properties can form a good form of generational wealth.
3) There are significant tax advantages for having a second, investment property in the US, which allowing for tax breaks to maintain the property.

4) If you have bought your investment wisely, there will be monthly cash flow coming from the property. When you own several properties you may be able to have the equivalent of your salary coming in, making you financially free.

5) The renters pay for the mortgage, leaving you with ownership of a house that you didn’t pay for.

6) You can use the power of leverage to your advantage, which is what really sets real estate apart from other forms of investment, together with it being a tax-favorable approach. When you by a property you can get it with 3.5-20% down, with the bank coming up with the other 80-96.5% of the money (well, they essentially create the money out of thin air, but that is another story). Although you didn’t put much of the principle down, you get to keep 100% of any of the profits. I am not sure where else you can achieve that with investments?

Investopedia have created a great introductory video on real estate investment properties: