Investing in Real Estate an Effective Wealth Building Strategy

Investing in Real Estate an Effective Wealth Building Strategy

Owning Real Estate an Effective Strategy for Building Wealth

In comparison to every investment product on planet Earth, real estate has no equal.  The point is only strengthened after you consider that interest rates remain at relatively low levels and investing in real estate allows the buyer to realize the benefit of leveraging borrowed funds.

Leveraging is probably one of the biggest advantages that real estate investing provides.  By securing a mortgage to purchase an investment property, the buyer capitalizes on the chance to use borrowed funds to create a monthly income stream and realize a gain on the underlying market value of the home.

The following example should illustrate why real estate investing is preferable to other investment vehicles.  If an individual spent $10,000 investing in the stock market and achieved a 10 percent return on investment, that $1000 might be exciting enough for him to tell his friends about it.  If the investor had spent the same $10,000 to purchase a rental property for $200,000, and the value of the home appreciated by 10 percent, he would have made $20,000.

Now that is something to get excited about!

Another point in favor of real estate investing is that the cash flow that can be created by stocks, bonds or other types of securities is often much smaller than the monthly cash flow that can be generated by a real estate investment.  It is unlikely that a single investment property will create a substantial monthly income stream, but the positive returns that could be achieved by owning multiple properties could definitely be life-changing.  

There are many other benefits to owning investment properties, such as:

·         Depreciation – This allows the investor to deduct a portion of the value of the property from their gross income each year.  No other form of investment offers this advantage.  Also, depreciation is regarded as passive income and not subject to self-employment taxes.

·         Elimination of Principal – If you are using a mortgage to buy an investment property, most of the monthly payment in the first few years will be allocated to paying interest.   The portion of the monthly payment that is allocated for the principal increases over the years.  The good thing is that interest is usually tax deductible, and the investor will eventually own the property free and clear, with no financial obligations other than property taxes and insurance.   

·         Diversification – To be successful as an investor, it is vital to pursue a strategy of diversification as a hedge against risk.  Real estate can be a highly effective way to diversify a portfolio, since it has a relatively low correlation with other investments, such as stocks and bonds.

Of course, one of the main issues that investing in real estate has is management.  Taking care of maintenance issues, tenants and accounting functions can be extremely time consuming.

Finding a property manager could be a good idea for an investor who doesn’t have the time or interest to handle these issues.  Property management companies provide an array of services, such as marketing, qualifying tenants, preparing leases, property maintenance, rent collections, security deposit management and disbursements, and income/expense reports. 

If you are considering investing in real estate, have questions about this article or would like a referral to a property management company, give me a call at 858-692-5120 or email frittscausby@gmail.com.