Did you know that only 5% of North Americans are financially independent when they reach retirement age? The other 95% are dependent on friends or families to make ends meet. If you envision a comfortable lifestyle during retirement with the proceeds from your Social Security checks but don’t manage to save a good portion of your income before retirement, you’ll definitely need another plan if you expect your social security checks to maintain your lifestyle later in life. You’re going to have to either continue working well past retirement age or have an extreme leading meager lifestyle until your death.
So now that you know the bad news about the majority of Americans, I’m going to help put you in that small 5% category. Below are my top five reasons why to invest in real estate:
Real estate values have experienced a steady increase in value for the last several years. This appreciation is due to the overwhelming demand for real estate. Besides serving as a basic human need for shelter that everyone on the planet must satisfy, several other factors are working to increase the demand for real estate.
Leverage the use of borrowed funds to finance the purchase of an asset leverage basically allows you to use other people’s money to buy more properties. Real estate investors use leverage to increase their purchasing power and finance investments that they cannot pay for otherwise. Leverage also allows investors to earn a higher return on their equity. For example, leverage allows you to buy a $1 million property with only $200,000 down. How else could you buy a million dollar asset for 20% down? Try duplicating this type of purchase with your company’s 401(k) program or buying stocks in the stock market. You just don’t have the same type of leverage that you do with real estate.
3) Tax Savings
If you acquire the right properties at a good price and manage them while your rental properties generate a positive cash flow you’ll be qualified for substantial tax write-offs including depreciation. They might show a paper loss for tax purposes. Let’s say a property generates $1000 a month and positive before tax cash flow (cash flow before taxes = gross operating income – operating expenses, debt service, and capital additions) you would pocket $12,000 a year. Well, let’s assume the depreciation amounted of $15,000 for the same period. Not only would you show at $3000 paper loss, you’d actually avoid having to pay taxes on the $12,000 gain for that year.
Although some management and record-keeping are required, your time commitment can be minimal compared to that required by most other businesses. If you invested in a software company, consulting firm, coffee shop, or bakery, you would be married to the business and you would have to dedicate many long hours to its success. Real estate investing can be done (at least before you create an expansive empire) without too much interference with your current job.
Most of the heavy lifting of real estate investing is done in the beginning when doing research and property selection. Once the neighborhood has been selected a house or apartment building purchased, and all units rented, you simply need to field phone calls from the property management company. Unlike a regular 9-to-5 job, my properties continue to make money for me regardless of whether I’m physically there are not. I’m not saying that you should become an absentee landlord, or that you neglect your properties. However, you don’t need to spend 10 hours a day to properties watching the grass grow as is expected that most traditional day jobs.
5) Pride of Ownership
Last and not least, but in my opinion, one of the most important aspects of real estate investing is being able to know that you physically own a building and are responsible for people’s shelter. Just like Donald Trump — real estate means power, let it be your own personal residence or the 24 unit apartment building you just purchased. Unlike owning a stock, a property is a physical asset, and you can go to bed feeling good about owning something that most likely will appreciate in value and you can physically go stand in front of and look at and say this is yours.
Once you understand the major advantages of investing in real estate, it is easy to conclude that very few if any other investments can match it. It is the principal means of wealth accumulation for financially independent individuals. I challenge you to become part of that small 5% that are financially independent when they reach retirement age.