Real estate is a great investment, but it’s not for everyone. It requires a lot of upfront capital and patience, but the payoff can be huge if you play your cards right. Here are some reasons why investing in real estate may benefit you:
Real estate is a long-term investment. Unlike stocks and bonds, which can be sold with the click of a button, real estate requires at least some level of hands-on involvement. The outcome is generally determined by your level of diligence and operational execution. This means that if you own rental properties, you will have to spend time managing them once they have been acquired or developed —and that's after the forecasting and due diligence prior to purchase!
Real estate is also tangible: unlike cash or stocks which don't physically exist as anything but numbers in your bank account and portfolio respectively, real estate actually exists in physical form. You can live in it or use it as an investment property, or both! It's important to note that real estate is an appreciating asset in which profitable outcomes aren’t directly subject to the volatility of the public markets. Again, you hold the pen.
Finally – and perhaps most importantly – real estate provides stability through diversification opportunities: those who invest their money into multiple types of properties – such as both residential homes and commercial buildings – will most likely see greater returns over those who put all their eggs into one basket (i.e. just investing solely in residential homes). This allows investors who purchase property under these circumstances take advantage of any potential increases throughout different markets without having all their money tied into one asset type. The same can be said for market selection, risk profiles, and even segments of the capital stack. This can be applied in many ways within real estate itself, investing across the spectrum to target a strategy YOU are comfortable with as an investor. And mogul is here to help.
Cash flow is the amount of recurring money that you receive from your investment, whereas profit is the amount of money left over your equity contributions after factoring in cashflow and appreciation. Both are important to a good real estate investor, but cash flow is an essential tool towards achieving solid profits. Here’s why:
A property may have an excellent rental history and be fully rented out for years, but if it doesn’t produce enough income to cover its expenses at an effective margin (usually ~50% or so), it might not be worth buying. On the other hand, a property may have only one tenant, but could be generating so much income in rent that it pays for itself without any additional effort on your part (even with some upkeep costs). The key here is finding properties that bring in solid cash flows on an ongoing basis—and as an investor, that means knowing how much yield they make.
Yield is calculated in many ways. As a basis, your yield over all-in cost is a good starting point. Say you have a monthly revenue of $1,000, and your expenses are $500 on a property that you purchased for $100,000. Your net operating income, which is rental income minus expenses, is $500 per month, or $6,000 per year. $6,000/$100,000 = 6.0% NOI yield over all-in cost. So what does that signify? I like to split every real estate analysis into three parts: basis, business plan, and exit. In other terms, purchase price, operations, and sale. If your 6% yield is being put up against a market where similar properties are selling for a 4% yield, also known as your cap rate, then you know right off the bat you are not overpaying for your real estate, and your “basis” is solid. In this scenario, you aren’t controlling the rents and subsequent NOI yet. So what are you controlling? You are controlling the purchase price. You will only want to pay for the real estate what will yield you a favorable day one yield relative to the immediate comparables. I don’t want to bore you with analysis paralysis, so check out our other posts on analyzing real estate for more info.
Tax benefits are a big reason why many people invest in real estate. The tax code rewards property owners with several valuable deductions and credits, including depreciation, tax credits and tax-free exchange.
Depreciation is the process of recovering part of your investment through deductions on your annual income tax return. The IRS allows you to deduct a certain percentage of your building’s cost each year over 27.5 years (39 years for nonresidential property).
Tax credits provide dollar-for-dollar reductions in what you owe Uncle Sam—they're even better than deductions because they reduce taxes dollar for dollar instead of just cents off per dollar spent/invested as with standard deductions! They aren't all created equal though… but more on that in another post.
Real estate is a great investment, and it’s not going anywhere anytime soon. With that being said, with every investment there is an inherent risk for every potential benefit. If you are looking into investing in real estate, then be sure to do your research before making any decisions because it could make all the difference when it comes down to how successful or unsuccessful your future endeavors turn out! Get started with mogul and allow us to make it easy for you.