Investing In Real Estate

"Be greedy when others are fearful, and be fearful when others are greedy."  Warren Buffet

Now is the time to invest in Real Estate.

There are four principles that make Real Estate an outstanding investment:

• Leverage

• Depreciation

• Appreciation

• Cash Flow

Leverage gives you the ability to take advantage of a properties value by only investing your cash at a portion of that value (i.e. zero to 10% or 15% down).  Your property is worth $300,000.00 but you have only invested $30,000.00.  You are using your leverage and counting on the property appreciating. Let's say it appreciates by 5% per year. This gives you an appreciation value of $15,000.00 per year base on a $30,000.00 actual investment.  Relying only on this strategy could spell disaster as many investors have recently experienced. They have tried to time the market to make a quick profit. This has led to disaster for many investors.  The key is to learn how to take advantage of all four of the principles.

Depreciation is a legal tax requirement for rental property. Currently, for single family homes, the land is valued at 20% of the purchase price and the home at 80%.  The estimated value of the house is divided by 27.5 and is depreciated by those equal amounts for 27.5 years. Under certain annual income restrictions, this depreciation is tax deductable. This is a tax advantage for owning rental properties. You will need to check with your professional accountant to see how this would specifically apply to your income level.

Appreciation is the increasing value of your property based on what people are paying for similar properties. The principle of appreciation tends to get all the glory. Unfortunately, this is often the only reason people invest in rental properties. The function of leverage is often overlooked. To be sure, appreciation will potentially create the greatest return on your investment, but by itself does not insure you have made the wisest investment decision.

Cash Flow, it seems has been largely discarded as an important concept by those who purchased properties as an investment vehicle over the past few years. Most people were only going for the greatest leverage and highest appreciation while essentially ignoring the other two important concepts of depreciation and cash flow. The market quickly became speculative and this led to a "gold rush" mentality.  Cash flow is important because it insures that you have a true investment that pays you a return on a consistent basis.

By balancing these four principles, one can make a prudent investment that pays high returns over a long period of time. Since properties can be bought at a price that is very low in the current market, this is the time to make a sound purchase using the wisdom of these four principles.

This is the optimum time to invest in rental properties. To understand how to be successful at this venture we highly recommend a book written by our friend Larry Garrett entitled "Advanced Concepts of Common Sense Investing in Real Estate" McMath Realty specializes in helping investors increase their wealth through purchasing investment properties. Contact us today.