Unlike the offerings from Wall Street, investment real estate is not limited to future appreciation or dividend pay out (rental income can be construed as the same as a stock dividend for comparative purposes) for its value/profit creation, nor is real estate investing as speculative and/or volatile as the stock market (if done properly).
Here are the 10 ways a real estate investor can profit from investment real estate:
1). Rental Income. The cash flow or rental income derived from investment real estate is a dependable source of income, with the potential for future growth and has an effective safeguard against the profit eroding natures of inflation. When comparing investment real estate to other investment options remember this---an investment that fails to deliver sufficient income (whether it be stock dividends or rental income) will in time suffer in value---conversely, investments that yield higher cash flows will show higher rates of appreciation. Don’t buy an asset, buy the current and future cash flow.
2.) Accelerated Mortgage Payoff. Anytime you pay off the mortgage on an investment property early, you create an equal amount of appreciation/equity. Success in this regard is particular sweet, when you are afforded this luxury as a result of your tenants.
3.) Property Improvements/Enhancements. Property Improvement can be loosely defined as anything that increases the current market value of the property---activities like expansion/build outs, rehabilitation and reconfigurations are examples of property improvement that can affect cash flow and profits.
4). Purchase Profits (buying at a discount). Making a profit on the front end of the transaction serves to mitigate your overall risks and increases your chances for greater profits/ROI (return on your investment) during the holding & selling phases of the investment real estate ownership life cycle.
5). Government Benefits (tax credits, tax deductions, rent vouchers, etc.). Real estate is the only investment that offers tax benefit/deductibility when you buy, hold and eventually sell the investment.
Here are a few of the tax benefits:
- Mortgage Interest Paid
- Property Tax Deduction
- Prepaid interest paid at settlement (for the tax year after purchase)
- The cost of discount points (same as above)
- Certain selling expenses (when you sell the property)
- Any seller concessions (same as above)
- Capital gains deferment (1031)
- Proceeds from cash out refinance in some cases are tax free
6). Strategic Property Management. Examples of strategic property management would be:
- Activities that would allow you to increase rent roll. - Activities that would allow you to decrease tenant turnover/vacancies. - Activities that would allow you to reduce operating expenses and increase net operating income.
7). Property Appreciation. Historically speaking, real estate has proven to be offer good appreciation rates over time---compounded this with the concept of leveraged capital & equity, makes real estate the clear winner in the long run.
8). Inflation. rent is subject to inflation (inflation is nothing more then the tendency for expenses [the price of goods & services] to rise over time). For example, a current rent roll of 800 with a 5% rate of inflation would be worth 1,303 in 10 years.
9). Leveraged Capital & Equity. To learn more about the power of leverage in investment real estate, see my article on “Real Estate Vs. Stocks - The Other Side Of The Story Every Real Estate Investor Needs To Know”.
10). The Law of Supply & Demand. Land is constantly being diminished (due to development and expansion) without being replaced---this fuels the “supply side” of the equation. Shelter is a necessary evil (everybody needs a place to live)---this fuels the “demand side” of the equation.
Investment real estate thrives in times of higher interest rates and or when affordability is an issue---when people can’t afford to “own”, they MUST therefore “rent”.
