OK, so I know I talked a bit about this in the regular investing thread, but figured I'd start this since that is mostly stock type investing and we also have a crypto investing thread. No reason to muddy up those threads more about a different topic, so....
Why Real Estate? My primary reasons
- Monthly Income
- Equity Gain
- Tax Benefits
- Other People's Money (OPM)
Monthly Income:
In my opinion, it's very risky to invest in real estate that does not produce monthly income after all expenses. So if you buy right, you should be able to cover principle, interest, taxes, and insurance (PITI) along with other expenses like maintenance and capital expenditures (Cap Ex). The monthly income is scalable since it is not directly tied to your time. Most jobs, whether salary or hourly, still require a certain allotted time to make the cash and there is limited time you can give. You can get a better job, but essentially there is almost always a ceiling to how much you can make. There is virtually no ceiling to real estate income, but it does take time to build.
Equity Gain:
This comes in two forms, typically. Principle pay down is the first, assuming you're leveraged and took a loan to buy the property. And by the way, you're not paying this out of pocket. See above why cashflow is important. The second is appreciation. Appreciation isn't guaranteed, but assuming you don't lose the property (see cashflow above and why it's important) and you are buying in a market with population growth, it is very likely you'll see appreciation over time. There are cycles to the market so it could lose value, but over time it will almost certainly go up in value. If you own a home, do you think it will be worth more/same/less in 20 years?
Tax Benefits:
You can depreciate a property on paper when it's tax season. Basically the IRS will let you claim the building is losing value, even though it likely isn't. Assuming it's a residential property (regardless of units) it can be depreciated over 27.5 years. This is the assumed building value. Typically in the neighborhood of 80-90% of the purchase. So for easy math lets say you buy a triplex for $343,750 and you say the building is worth 80% of the purchase price. 343,750 x 0.8 = $275,000. So for the next 27.5 years, you can depreciate it evenly which in this case comes out to a nice $10,000. So on paper, your building is losing value at $10k per year. What does this mean? If you made $10k on this property that year, you owe zero dollars in taxes because you "lost" money that offset the money you made in cashflow. If you make $7k in cash from the property, the remaining $3k in "losses" can be applied to your W2 income, still saving you money at tax season.
OPM:
Other people's money. Usually this is a bank. So while investing $20 in the stock market buys you $20 in stock, investing $20 in RE means buying $100 in real estate. Leverage comes with risk, but has huge upside if you can make your payments until fully paid off, see cashflow above and why it's important. Furthermore, whether it's natural appreciation, or you did things to the property to raise it's value, you can refinance the property and potentially pull all of your down payment and/or rehab money. Why is that nice? Well you can recycle your money and buy another. Lather, rinse, repeat. Oh, and if you're making money each month on a property that you have none of your own money, you've found investing nirvana.....an infinite return on your money.
Investing in RE is a get rich slow scheme, but the good news is that you do get rich. Everybody knows somebody that works their ass off and doesn't make money in it. But why follow them? You also know that some people do well in it. Follow them. It's not as hard to understand as people often think, it's do-able. If you do it even somewhat smart, you will become wealthy. Obviously I'm passionate about it because I've seen first hand results how many lives it changes. I'm here to help anyone interested in that. Let me know how I can help.
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