The economic climate in America is gradually warming up and more people are wondering how they can take advantage of the stronger, safer economy. Investors of all levels are considering how they might benefit most. Should they purchase stocks for new, up-and-coming businesses? Should they talk with their bank about other interest-based incomes? Should they just tuck it away for the future?
Real estate is a tried and true method for making steady supplemental income, although it does come with some risks. First, buying real estate requires a relatively high up-front investment of capital, for closing costs and the down payment. Second, it is less liquid than many other investments, requiring at least a month to sell (often longer). Third, there is legal liability inherent in owning real estate, which is not present in owning stocks or bonds. Fourth, property management requires occasional effort by the landlord. Finally, there are repairs and vacancies to budget for, when owning and leasing out rental properties.
These risks are relatively simple and easy to understand, and despite their reality, real estate investing is a great way for steady passive income. See below for an explanation of some of the oft-overlooked benefits of, and some tips and information on how to make money, investing in real estate.
Stocks and bond prices are always in flux and therefore a gamble, bank interest rates are negligible, and money tucked away in savings (or a mattress) will actually lose money to inflation. Real estate, however, will not only increase in value over time, but often does so quickly. As most homeowners know, a home bought for $100,000 today could be well-worth $200,000 in 10 or 20 years. A great resource for looking at how a home or another property has appreciated over time is Zillow, which is a database for information on sales prices and tax value. Another option is talking with a real estate agent who has access to the local multi-listing service.
Homeowners that make improvements to their homes will also see great returns. Those who choose to invest in multiple properties have the luxury of watching all of their investments grow with time. While there have been breaks in the market which caused people to lose values in their homes, like the 2007 "Bubble Burst," these market breaks really do not affect long-term owners. If the market has a tough year, wait it out. Owners can study the market carefully to determine when selling will yield the highest return.
For investors with more capital to put down, buying additional properties such as rentals is a great method as well. Purchasing buildings that are already used as rentals (complexes, duplexes, or commercial space) is a very easy way to invest safely. A property that already has renters, and a stable history of rent payment, gives new buyers reassurance that they will be able to make all their payments, and then some. Rent rates increase almost every year, yet a locked-in mortgage rate and payment will stay steady. That means, if an investor locks in a good rate they can watch their income increase every year, while the bulk of their cost will stay stagnant.
Delegate Rental Management
One of the reason rentals are such an ideal investment for so many is that the bulk, if not all, of the work can be delegated. Hire a property manager, leasing agent, financial advisor, and maintenance team - all the work will then be done for you.
Financing Real Estate Is Just Plain Easier
Banks have a lot more faith in financing real estate than in other types of investments and loans. A person with a reasonable amount of capital (10-20%) and a solid rental plan is very likely to get the loans they need to purchase rental properties. Even if the same person walked into the same bank for a different type of loan, the story is often completely different. Banks want to fund real estate. They know it is stationary and can be repossessed, and will appreciate.
Those with substantial investments in real estate have steady investment income, backed by tangible investments that can be liquidated if desired. If investors hold on to their rentals, these properties become increasing, steady retirement funds (especially after the mortgage is paid off). The buildings can also be sold at any time to cover greater costs or to simplify someone's day-to-day.
Every expense associated with real estate ownership is tax-deductible. Hazard insurance, mortgage interest, real estate taxes, repairs, maintenance, property management fees, gas mileage in visiting rental propertiesâ€¦ it is all tax-deductible. There are even tax deductions for expenses that don't actually cost money, such as depreciation over time. So even a bad year for a property may still earn the landlord money, in saved taxes!
Before you invest in real estate, you should be well-versed in how it can benefit you but also about what can go wrong. You should meet with a consultant beforehand to answer any of your questions.
Brian Davis is the Vice President of EZLandlordForms, a leading provider of important documents like rental leases.