November 17, 2009

Why you SHOULD Invest in Real Estate

Yesterday I gave a bunch of reasons Why You Should NOT Invest in Real Estate. I was purposefully trying to scare away the weak of heart. But that was more of a worst case scenario and most of that stuff won't happen or at least won't turn out as bad as that. There are a lot of good sides to owning rental real estate. Today I'll be more optimistic and point out all the great reasons why you SHOULD invest in real estate.

Monthly income - If you get the right property with the rents higher then the expenses then you should see a positive cash flow. You can even do this with a relatively low initial investment and get a higher monthly return for your money than other investments. For example a $10,000 down payment on a duplex might give you a $2,000 annual income for a 20% return.

Long term appreciation - In the long run real estate appreciates. Even though we've seen the real estate market go down lately, in the long run real estate has grown over the years.

Renters pay off your mortgage - With a loan you can buy a property with just the down payment and then the rent will pay your mortgage. Then over the years the mortgage will gradually be paid off until 30 years later you own the property free and clear.

Inflation protection - Rents will generally go up with inflation so your rental income is tied to inflation. With other investments such as bonds or simple savings interest there is no inflation

Tax benefits - Everything you spend on the rental is a potential tax deduction. If you have a mortgage then the mortgage interest is a tax deduction. This helps offset rental income. Another big tax deduction is the depreciation. You can deduct about 1/27.5 of the value of the property as depreciation. Combining mortgage interest, other costs and depreciation it isn't hard to see a profit turn into a tax loss.

Tax deferral on gains - You generally don't have to pay taxes on your gains until you sell, even then you can potentially defer those gains. As your equity grows in a property you have no immediate tax bill due. You could potentially accumulate value in your rentals and never pay taxes if you don't sell them. Even if you do sell a unit and buy another rental you can use a 1031 exchange to defer the taxes.

Stable business - No matter what happens people will need a place to live. Demand for rental units may go up and down but the market will not die out due to some new technological innovation or things like off shoring. You can count on rentals being a viable business well into the future.

You are the Boss - When you own real estate you are in charge of the investment. This is good for a couple reasons. First you get to run things they way you want to. So you have the flexibility get to dictate how things work to suit your own preferences. Second you aren't dependent on someone else to do a good job. You don't have to rely on a the success of individual financial managers or hope that Wall Streets actions will fall in your best interests.

Emergency housing - Worst case if you lost your home for some reason you could move into your rental property. It could be a fall back housing option. You could also use your rental property as emergency housing for people you love. For example if your parent or sibling had extreme financial difficulty then you might be able to subsidize them by allowing them to live in your rental property either free of charge or for a reduced rent.

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