I was recently involved in a conversation that centered on a few different real estate investment strategies. All that were involved took different viewpoints on their preferred asset category, risk tolerances and expectations. While the participants had a wide array of resources and professional experience, what I took away from the conversation and what is the essence of this article, is where everyone was in agreement: real estate provides the opportunity for many forces to work together over the long term to benefit the real estate investor. Below are a few of the basic benefits of investing in real estate.
1. Benefit of Positive Cash Flow/Income
If purchased correctly, the income from real estate investments should be putting more money in your pocket than coming out to cover the expenses. One of the biggest mistakes that I see is underestimating actual operating expenses or improvement/construction costs. As I’ve touched on in my last article, “7 Great Quotes – Best Investment Advice Ever,” know your numbers.
2. Benefit of Principal Reduction
In most cases real estate is purchased using a debt or a mortgage loan. By making the scheduled payments on the loan, you’re paying down principal on the loan and reducing your debt. Therefore, you are increasing your equity position in the real estate investment.
3. Benefit of Appreciation
This is the increase in the value of an asset over time. Historically, real estate values have outpaced inflation and appreciates over time. If real estate values are going up then your investment is appreciating. Appreciation coupled with principal reduction can work together to improve your equity position in a real estate investment.
4. Benefit of Depreciation
This is the method of allocating the cost of a tangible asset over its useful life. For real estate investments the IRS lets you depreciate the allocated cost of the improvements over either 27.5 years for residential properties or 38 years for commercial properties. Example: If a commercial office building is purchased for $500,000 and the building “improvements” represent 80% of the purchase price, then you can depreciate the value of improvements or $400,000 over 38 years. On a full calendar year the depreciation amount is $10,526. The amount depreciated reduces your taxable income on the real estate investment and has the potential to show a loss on paper, when in reality you had positive cash flow for the year. (Typical disclaimer: Please consult with your tax advisor on specific tax-related matters and your individual circumstances).
4 Benefits of investing in real estate Click To Tweet By choosing to invest in real estate and effectively selecting quality investment options, each of the above factors can have positive results. Coupled together, they can have tremendous benefits to the real estate investor over the long run.
About Kevin Wattenbarger – As a founding advisor of the SVN office in Panama City, Kevin has extensive knowledge and experience in the regional market. He specializes in the sales and leasing of retail, office, industrial properties and commercial land. Click here to view his full profile and listings, or to contact him, you can call him at 850-532-5454, or email him at [email protected] You can follow him on Twitter at @NWFLCommercial.