There are a lot of “gurus” out there who promise to teach you how to “get rich quick” through real estate investing. While much of what they’re selling are high-risk schemes, there is a way to make predictable, low-risk income through real estate investing.
Here are some tried-and-true tactics that can be used to increase your income, pay off debt, even fund your retirement!
WHY INVEST IN REAL ESTATE?
One of the basic principles of real estate investment lies in this fact: everyone needs a place to live. But there are other reasons why real estate is a great investment choice.
1. Appreciation – Appreciation is the increase in your property’s value over time. History has proven that over an extended period of time, the value of real estate continues to rise. That doesn’t mean recessions won’t occur. The real estate market is cyclical, and market ups and downs are natural. However, in the vast majority of markets, the value of real estate does grow over the long term.
2. Hedge Against Inflation – Inflation is the rate at which the general cost of goods and services rises. As inflation rises, prices go up. So, the money you have in your bank account is essentially worth less because your purchasing power has decreased. Luckily, real estate prices also rise when inflation increases. That means any money you have invested in real estate will rise with (or often exceed) the rate of inflation.
3. Cash Flow – One of the big benefits of investing in real estate over the stock market is its ability to provide a fairly steady and predictable monthly cash flow. That is, if you choose to rent out your investment property to a tenant, you can expect to receive a rent payment each month.
If you’ve invested wisely, the rent payment should cover the debt obligation you may have on the property (i.e. mortgage), as well as any repairs and maintenance that are needed. Ideally, the monthly rental income would be great enough to leave you a little extra cash each month, as well. You could use that extra money to pay off the mortgage faster, cover your own household expenses, or save for another investment property.
4. Leverage – Leverage is the use of borrowed capital to increase the potential return of an investment. For example, if you purchase an investment property for $100,000, you might put 10% down ($10,000) and borrow the remaining $90,000 in the form of a mortgage.
Even though you’ve only invested $10,000 at this point, you have the ability to earn a profit on the entire $100,000 investment. So, if the property appreciates to $120,000 – a 20% increase over the purchase price – you still only have to pay the bank back the original $90,000 (plus interest) … and you get to keep the $20,000 profit. You’ve essentially doubled your money, even though the market only went up by 20%! That’s the power of leverage.
5. Tax Advantages – An often overlooked reason to invest in real estate is the tax benefit. When you record your income from a rental property on your annual tax return, you get to deduct a number of expenses associated with the investment. This includes rental expenses, such as homeowner’s insurance, property taxes, maintenance fees, advertising, mortgage interest, utility costs and property management fees.
You may also qualify for the Capital Cost Allowance (CCA), which is depreciation that can be claimed on your property. Be sure to consult a tax professional, as you may be responsible for repaying this deduction when you sell the property.
Even if you’re not interested in owning a rental property, your personal residence can serve as a tax-free investment vehicle. Generally, when you own an investment property you pay a capital gains tax on any profits you make when you sell the property.
However, when you sell a principal residence, you are exempt from paying these taxes. That means, you can purchase a property, live in it while you remodel it, and then sell it for a tax-free profit a couple of years later. This can be a great way to get started in real estate investing.
TYPES OF REAL ESTATE INVESTMENTS
While there are numerous ways to invest in real estate, we’re going to focus on three primary ways average investors earn money through real estate. We touched on several of these already in the previous section.
1. Remodel and Resell – Commonly referred to as a “Fix and Flip,” investors purchase a property with the intention of remodeling it in a short period of time with the hope of selling it quickly for a profit. Investors need to understand the risks involved and be prepared financially to cover additional expenses that may arise.
2. Traditional Rental – One of the more conservative choices for investing in real estate is to purchase a rental property. The appeal of a rental property is that you can generate cash flow to cover the expenses while taking advantage of the property’s long-term appreciation in value and the tax benefits of investing in real estate. It’s a win-win, and a great way for first-time investors to get started.
3. Short-term Rental – Platforms that facilitate short-term rentals, like Airbnb and HomeAway, are booming. Their popularity has spurred a growing trend toward dual-purpose vacation homes, which owners use themselves part of the year, and rent out the remainder of the time. There are also a growing number of investors purchasing single-family homes for the sole purpose of leasing them on these sites.
However you choose to invest in real estate, make sure you’re working with a real estate agent who has knowledge of the investment market and can guide you through the process. While no investment is without risk, a conservative and well-planned investment in real estate can supplement your income and set you up for future financial security.