Why Invest in Real Estate?
Residential property
- Real Estate is a proven passive income vehicle.
- Property investing can give tax advantage, cash flow, appreciation and loan pay-down or amortization.
- You can buy real estate with the bank’s money and use leverage.
- You can add value to your property by doing small cosmetic changes or large-scale rehab or renovation.
- All expenses related to an investment property are tax-deductible including Property management fee.
- Depreciation – Depreciation is a paper loss that can offset your taxable income from the property. The government allows you to write off the building cost as depreciation for a set number of years depending on type of property thus creating a paper loss.
- The property market is less volatile compared to the share market
There are many types of real estate (residential, commercial) and different strategies (buy and hold, flip, wholesaling etc). There is no right or wrong choice. It is simply what your objective is and which strategy suits you. A person nearing retirement age might prefer cash flow positive properties where as a 30-year-old person might have more time and might target appreciating or equity growth properties.
What type of Real Estate?
Multifamily or Apartment complex
Real estate can be classified as residential and commercial. In commercial there is multifamily (apartment complex), retail, office, industrial, commercial land, agricultural, hotel and motel etc. Each type of real estate has its own pros and cons. For example you can get a higher loan to value ratio for residential property compared to commercial in general. Some investors specialize in a particular type of real estate and this is a good idea.
Why cash flow positive properties?
Cash flow positive properties are where the income from the property is higher than the expenses associated with that property. This includes mortgage repayment as well. Buying real estate for flipping has huge tax impacts. Buying properties with the aim of selling at higher price due to price appreciation or equity growth is a lot of guess-work for beginners. No one has a crystal ball regarding a particular real estate market. Cash flow positive properties can self fund themselves after an initial down payment and a suitable loan. There is no limit to how many of them you can buy as long as you can fund the initial deposit and find a loan. Positive cash flow properties can put extra income after all related expenses back in your pocket.
Where to find cash flow positive properties?
Commercial office space
Depending on where you live it may be hard to find cash flow positive properties. Why not look interstate or overseas? For example USA. The US property market crashed in 2008 and there are still foreclosures today. Foreclosure as defined by Wikipedia is “a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan”. Banks are selling the foreclosed properties well below the market price and sometimes up to 30% to 40% below retail price. There are two main reasons for foreclosures: the borrower’s income has been adversely affected (by the GFC – Global Financial Crisis or layoff) and/or the property price has gone down significantly where the loan payments are too high compared to the rent for the same property. So the borrower walks away from the property and the mortgage. The borrower then rents a similar property for significantly lower cost. The borrowers credit rating takes a hit when this happens.
The US property market is an example of how you can think outside the box to find cash flow positive properties and this is by no means the only way to find cash flow positive properties. There are some risks attached to this market that needs to be considered. I will be posting further on this topics shortly.
Check out the Resources page for recommended reading materials or click on the Real Estate Investment category link on the blog.
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