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Is Investing in Real Estate Worth It?

Updated on March 21, 2016

Investing Overview

Few people realize the work that goes into investing in real estate. Over time, this is a great way to build wealth and sustain a lifestyle. Many people are drawn to real estate investing because of passive income. This is income where the money keeps growing without time being put into the equation. There are a lot of advantages to passive income, and this is one of the reasons why investors are so drawn to real estate. Investing in real estate has four main advantages.

  • Cashflow
  • Amortization
  • Depreciation
  • Appreciation

Developing a Plan

As an investor, it is vital to develop a plan when investing. There are a lot of people who simply start investing to try and make something happen. If you want to take the next step with your investments, there are a lot of things to keep in mind during the process. Not only do you need to think about the long term, but there are financing or cash requirements in the short term as well.

The Benefits of Real Estate

There are a lot of benefits to investing in real estate versus other asset classes. Over the long term, real estate tends to appreciate as you build up wealth. In addition, there are a lot of people who enjoy buying and owning real estate. Anyone who wants to take the next step with their wealth should look to this asset class as a way to build up their portfolio. Managing cash flow and tenants is difficult, but over time investing in this area is one of the best things that you can do for your money. Always keep the long term in mind when it comes to investing.

Real Estate Planning
Real Estate Planning

Cashflow

Earning cashflow every month is one of the best things about real estate investing. Many people assume that rent - mortgage is equal to your monthly cashflow. However, there are a lot of other expenses to keep in mind when renting out a property. A good rule of thumb is to estimate that 50% of your rental income will go to expenses other than your mortgage over time. Although this is a conservative estimate, it is a good indicator of how much your real cashflow will be.

Increasing Cashflow

There are many ways for investors to increase their cashflow over time. Anyone who wants to take the time to invest in real estate needs to make sure they understand the cashflow equation. Just like any debt, getting rid of payments require debt payments. However, paying off a home is much more difficult than paying off your student loans. Learning how to increase your cashflow is one of the most important parts of investing. A lot of landlords will simply increase the rent every year. While the mortgage payment stays the same, the rents rise over time. Here are some ways to increase cash flow in your real estate business.

  1. Pay Off Debt
  2. Increase Rent
  3. Reduce Other Expenses

House
House

Amortization

This sounds complicated, but really just means debt pay down over time. If you have a mortgage on a home, part of your payment goes to the principal balance on the debt. The longer the loan term, the more interest the borrower pays over time. One of the biggest advantages of real estate investing is that landlords experience amortization gains over time simply by renting out the property. Instead of having to pay for the mortgage, the tenant pays for the amortization over time.

Long Term Wealth

This process leads to a lot of long term gains on paper. If you hold a property for 30 years, the tenant will pay off the entire mortgage. There are obviously going to be a lot of issues during that time that you have to deal with, but amortization is one of the most important aspects of building wealth through real estate.

Real Estate Poll

How Do You Feel About Investing in Real Estate?

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Real Estate Investing vs. Other Options

Real Estate
Stocks
Cash
High Risk
High Risk
No Risk
Very High Return
Average Return
Marginal Return
Low Liquidity
High Liquidity
Liquid

Depreciation

Taxes are boring, so spending a lot of time on depreciation may make for good night time reading. There are a lot of people who overlook the benefits of depreciation on their home. Over time, landlords can write off a lot of expenses that they would otherwise be unable to do. This leads to a huge amount of tax savings over time. If you have questions about this process, it is a good idea to talk to your CPA.

Money
Money

Appreciation

Perhaps the best aspect of real estate investing is appreciation. Real estate generally appreciates in price over the long term. Unlike investing in stocks, real estate investing is usually a lot less volatile. There are a couple of factors that influence the rate of appreciation in stocks.

  1. Location
  2. Quality
  3. Economic Conditions
  4. Age of Home

Appreciation Over Time

There are a lot of factors that influence appreciation over time. As an investor, appreciation leads to a lot of paper gains in your net worth. One of the benefits of real estate investing is the fact that you are able to leverage a small amount of money to purchase a large asset. On a $200,000 home, an investor may only have to put down $40,000. This $200,000 may turn into a $350,000 property over a period of ten years. As the tenant pays down the principle balance, the property continues to build in value. Always look at the price of a home when you are spending money. Real estate investing can lead to financial independence, but it takes a lot of hard work over a long period of time to accomplish this goal.

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