Real Estate Investing is IDEAL
Real Estate Investing has a number of benefits that you don’t get with other forms of investing. The acronym IDEAL refers to the different ways real estate can help you build upon your wealth.
- Income
- Depreciation
- Equity
- Appreciation
- Leverage
Income
Real estate is a great way to rack up your income. This can be done through rental properties or investment shares (REITs). It’s already proven with historical data that real estate provides consistent, reliable income to investors. Rent is a big factor, of course.
For people that can are able to hold multiple properties on their portfolio, the income from real estate can even replace their day job salary.
It’s not the same with stocks, of course. For example, when the stock market goes down, most of them go down. As of December 2018, the S&P 500 yield was 1.9%. The yield on a 20-year treasury bond was 3.01%. REITs? Over 5%.
Rental Income
Whether you own studios, 1-bedroom condos, duplexes, or commercial offices, each unit nets you a cheque every month. Once you have enough properties under your belt, you will be able to build up a big enough cash flow to replace your day job. So you can spend time on stuff that REALLY matters, like planting some claymores in Call of Duty Modern Warfare.
Also, keep in mind that you are building equity on these properties. As time goes by, you are paying off the principle. As you pay off the principle, you are able to gain access to the principle in the form of a loan, which can be beneficial in many different ways. You could use it for another down-payment. A big vacation. A rainy day.
As for REITs, they provide a way to invest in huge projects. Commercial, industrial, and residential projects are within your choice! On top of that, they pay out a share of the profits as dividends to the shareholders, which guarantees you an income stream. You can use the yield to reinvest or treat yourself to some cash.
Depreciation
Depreciation is a great way to get around taxes. You definitely want to hire a good accountant / CPA in order to take FULL advantage of depreciation, because they will save you a LOT more money than the fees you end up paying for their service.
The basic idea is that real estate property values can go up or down. If it goes down, you could use the difference to reduce the taxable profits of your investments.
It’s honestly something that every investor needs to take advantage of. There can be many different ways this can unfold. For example, if you have multiple properties, you could use depreciation from certain propeties to offset the income on other properties. You could also mark off depreciation over the span of multiple years, which is quite tricky but doable with the right CPA. Remember, you hire the best, you receive the best!
Example
Here is a simple example. Let’s say your income from real estate investments was $60,000, taxed at 20%. Your property depreciates by $10,000. This means your taxable income is $50,000. You basically don’t have to pay taxes on the $10,000 depreciation, thus saving $2,000!
REITs also benefit from the same advantage. The tax savings are passed along to their investors through dividends or value appreciation.
The Catch
The catch with depreciation is that you need to pay off the depreciated amount when you sell your property. So basically, you are paying off the “exempted” taxes from depreciation when you sell.
Equity
Equity is the value of a property that YOU actually own. For example, if you have paid down $20,000 on a $100,000 house, then you have $20,000 equity on the house.
With your monthly mortgage payments, you will be shaving off on that principle, further increasing your equity over time. You could make extra payments to your mortgage to chop down some extra debt, which means you can pay less interest on your mortgage. As your equity grows, your interest payments shrink, and more of your rental income can go towards paying down more debit, which builds up even more equity!
An increase in equity translates to more wealth. How? You could leverage it to take out a loan on the existing equity and use it to invest in another property. This can help you quickly boost up your real estate portfolio.
REITs can also take advantage of this. The holding companies can use equity to their leverage and ensure that their investors get the best bang for the buck.
Equity can also change based on market value. There are two aspects you need to know.
First is the market. This, you cannot control. The market can fluctuate. The economy can go up or down. There could be a natural disaster. There could be an influx of immigrants that increases housing demand.
Second is the property itself. This, you can control. You can do renovations and make smart upgrades that will increase the value of the property and make it more desirable to renters. Sprucing up the property generally leads to an increase in income-producing abilities.
Appreciation
Appreciation is basically where the value of a property goes up over time. Generally speaking, there are two main ways of making money in real estate, and one of them is appreciation (the other being rental income).
Appreciation is a huge aspect. Some people will invest in a property that has negative cash flow but high appreciation, and end up money by selling high. Of course, you shouldn’t do this unless you can tell the future, but some people are really good lucky at that.
There are two reasons how a property can naturally appreciate.
First, there is the general market. The demand in your city could increase. Maybe a company is setting up their headquarters near your property. The government could introduce incentives for development. Maybe weed became legal and everybody that wants to smoke weed will come there.
Second, there is inflation of currency. Real estate has shown through history that it rides currency inflations, and often times beating it.
Leverage
I personally love making deals. I love seeing what makes the other person tick, and how I can negotiate the deal in my favor. Leverage is really important in making a deal because it can give you a fortune or break your nose.
I have my own financial goals. I have big ambitions for myself, and real estate gives me a really good leverage to hit my goals. By putting down a small lump sum, I am able to be the owner of a property. In Canada, I could pay the minimum 5% down payment but benefit as if I owned the property in full. I get to keep 100% of the income, appreications, capital gains, and tax exemptions.
Another really great leverage is the home equity line of credit (HELOC). First, this is a tool, which can benefit you but also shit on your portfolio if you don’t know what you are doing. Second, this is tax-free, which I think is the greatest feature of HELOCs. You can basically take out tax-free equity that you have on your home and use it to invest in more properties.
Here’s to learning more about investing!