21 Jul 8 Reasons to Invest in Real Estate (Part 2)
“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” (Andrew Carnegie, billionaire industrialist)
I agree with Andrew Carnegie because real estate investing is a wise investment for the average person. Last week I shared that real estate is a great business to invest in because it has built in demand, great leverage and you have direct control over your investment. If you missed last week’s blog, go back and check it out! Since we only covered 3 of the 8 reasons last week, I would like to share with you more about the 8 reasons to invest in real estate. So, I will explain how cash flow, arbitrage and insurance are also great reasons to invest in real estate.
First, let’s discuss cash flow. If you have 30 houses times $300 a month positive cash flow after PITIM that is $108,000 annually. PITIM stands for principal, interests, taxes, insurance and management. So, not only do you have $108,000 but it is tax free. Why is it tax free? It is tax free because the IRS allows for property minus the value of the land under it ot be depreciated at 1/27th per year. That means that if a property minus its land value has accost basis of $100,000 then $3,704 is considered a loss. This is true even though in reality the property is appreciating every year.
The positive cash flow of $300 per month per house equals $3,600 annually. Since the positive cash flow of $3,600 is “sheltered” by the “phatom loss” of $3,704, no net income is recorded. This means you get to spend the money free of taxes. I use the $300 model here because $300 a month is the minimum positive cash flow you should consider in a rental property.
Second, let’s focus on arbitrage. Perfect arbitrage is buying low and selling high. In real estate investing, you can almost always buy low and sell high if you know what you are doing. How is this possible? The situation of the seller and the condition of the property make this possible. Foreclosures and short sales are conditions where the sellers need to sell the property below value, and there can be many reasons why the seller needs to do this. Perhaps the property is bank-owned and the bank just wants it off their books, or perhaps the seller is going through a divorce or moving out of state. Maybe the investors are looking to get out of a property. The reasons are endless. Never take advantage of a seller. However, in most cases, you will be doing the sellers a favor by taking the property off their hands.
The other reason you can buy low and sell high is due to the condition of the property. In this instance, you would be looking for properties that need to be repaired. The best of these kind of properties are those that just need a little lipstick—paint and carpet. Once you develop a team of contractors that can do more than paint and carpet, this will empower you to find more properties that you can buy low and fix up to sell high.
Last, let me tell you about insurance. Real estate is one of a small number of investments that can actually be insured against loss. You can insure properties against hazards like fire and tornadoes, and you can even protect yourself against lost rents if something happens to your investment property. Also, be sure to get liability insurance to protect you against financial loss if someone gets hurt on the property. Did you know you can even get insurance for equipment loss? If an HVAC, water heater, or other equipment breaks, the equipment loss insurance will repair or replace it for a small deductible! Don’t we all wish the stock market was insured against loss!
Are you ready to follow Andrew Carnegie’s advice and invest in real estate?
I will share more of the 8 reasons to invest in real estate next week. Come back to learn more, and you can also learn more about real estate by joining my next Real Estate Mastery workshop. September 23-25 in Denver, Colorado.