A commonly used phrase used by the investors is “Real Estate investments are IDEAL.” Real estate offers you 5 benefits which hardly any other investment sector can boast of. IDEAL is actually an acronym where each letter stands for a benefit of investing in real estate. So let us see what makes it Ideal:
- I stands for Income or Cash flows. Your real estate investment does generate income or positive cash flows for you from the rentals received. This cash flow provides you an additional source of monthly passive income on ongoing basis. The cash flows in real estate is steady and more predictable than the returns from your equity based retirement plan. However, one should also draw a caution of lean period where the property remains vacant and does not earn any income for you. Since the negative cash flows in the form of operational costs, mortgage payments continue irrespective of the occupancy of the property, one should carefully plan the net operating income or NOI considering all the factors for positive and negative cash flows.
- D stands for Depreciation which is non-cost accounting method to book the entire financial burden of real estate investment. Depreciation value is a factor of the overall value of property structure and the recovery period (time period may vary depending on whether property is commercial or residential). IRS allows you to set off the depreciated value of property structure against the taxable income thus bringing down your tax liability. However, the value of land on which property exists is not allowed to be set off. As the property gets older every year, the depreciation value of its structure goes down as well.
- E stands for Expenses which are operational expenses related to holding a property. These expenses include insurance costs, utility expenses, mortgage fee, interest costs and property or wealth tax as applicable. Most of these expenses are tax deductible reducing your tax liability. In fact even when you sell your property for a loss, the loss can be carried over for years to be set off against your taxes.
- A stands for Appreciation in the valuation of the property. This is the primary objective for which an investor puts his money in real estate to grow his net worth. Economic cycles come and go, there will times during recession when your property valuation could be even lower than your initial investment and so does the rent. The key to getting a good appreciation is patience. One needs to invest not just money but also invest time. Stay invested in real estate for long term which can even go for decades. Your property will surely give you manifold appreciation.
- L stands for Leverage. Real estate investments are expensive because you have to invest more than your annual income. To minimize this risk of upfront large sum of money, investors leverage by taking mortgage from a financer. So an investor essentially pays only a part of the total sum whereas the financer pays the majority of it (most cases it is close to 80%). Investor repays the loan through monthly installments to the financer, thereby reducing his investment risk.
These 5 points show exactly how and why a real estate investment is IDEAL. These points show how it is always worth it to purchase a real estate investment property rather than your tradition stocks and other forms of investments. If these points have been useful or if you have any feedback you would like to share feel free to comment below!