Using Real Estate to Control Risks
Real estate allows you to control your risk because you can actively participate in the decision-making process. Passive investments such as stocks don’t give you this opportunity. Movements in investment real estate values are less erratic than in the stock market. Most people don’t understand the economic forces influencing the market. Since real estate is less volatile, it’s easier to control and to understand. A real estate investment is tangible. You can touch it, you’ve been exposed to it all your life, and you can identify with it. As a result of this familiarity, you are better able to understand it.
Effectively Reducing Your Taxes
Real estate ownership,especially midsize apartment buildings, continues to be the most popular form of investment because of its potential for substantial tax savings. Since you are able to actively participate in the management of real estate, the Internal Revenue Service (IRS) currently allows qualifying individuals to write off up to $25,000 per year against salary and other income. No other investment gives you this capability. In addition, you can defer paying income taxes on profits indefinitely by using tax-deferred exchanges.
Leveraging That Works
Real estate is the only major investment that gives you the ability to acquire ownership with very little money down. This degree of leveraging allows you to amplify profits by using other people’s money. The more assets you are able to control, the more opportunities you have to succeed. The degree of leverage is calculated by dividing the total purchase price of the property by the amount of funds used to purchase it. Thus, if a down payment of $10,000 plus a $90,000 loan is used to purchase a property, a 10 to 1 leverage ratio has been achieved. The greater the leverage, the more equity will increase or decrease with the change in value of the property.
Why Real Estate Investments are a “Smart” Way to Become Wealthy
Over 50 percent of the wealth of the world was in real estate in 2000. In the United States, real estate accounted for 48.2 percent of the wealth (of which residential real estate represented 36.7 percent). Equity investments (stocks) amounted to 19.3 percent and bonds 21.1 percent.
Real Estate Versus All Other Real Estate Investments
In the past 20 years, multifamily income properties have delivered the highest average total investment returns of all real estate types. With a built-in hedge against inflation, it’s no wonder that multifamily real estate has out-performed all other types of real estate investments with relatively low risk. Based on supply and demand over the next 10 years, residential income will out pace all other types of real estate investment. Strong demographic and financial indicators along with changing lifestyles should continue to positively influence apartment investments.
With an average unleveraged rate of return of 10.2 percent over the past 20 years, residential income property has proven to be an attractive low-risk investment. From 1990 to 2000 residential income investment provided a more consistent higher total average rate of return than all types of properties and with less variance.
Although 10.2 percent is a great rate of return, it won’t get me on the dance floor. What will get me dancing is the rate of return using leverage. A rate based on a 25 percent down payment (leverage) works out to be over a 20 percent rate of return. This type of return definitely gets my feet moving.
Three Advantages Apartment Investments Have Over Other Types of Real Estate
Apartments should remain well ahead of other major property types because they are generally more stable. Three important factors account for this stability:
They are less dependent on business cycles for occupancy than any other types of real estate investments. It doesn’t matter if interest rates and home prices are high or low, apartments are generally more affordable.
Apartments have shorter leases; thereby offering greater protection from inflation than the long-term leases associated with other properties. That is, rents can be negotiated more frequently.
The pool of tenants is much greater for apartments than other types of properties. This ensures a more consistent occupancy than industrial and commercial properties, which usually have only a few tenants to choose from.
The Building Size That Gives You the Greatest Profit Potential
When investing in apartment complexes, try to find the right building size that makes the best use of your time and gives you the greatest profit potential. Single-family houses and small apartment units do not always work because of the competition and property management problems. Managing property on a day-to-day basis may not be for you. You could spend just as much time on a four-unit building as on a 40-unit complex and not make nearly as much money. In fact, because owners of smaller properties usually become emotionally attached to their property, you tend to spend more time with them telling them that they made the right move. Larger units are the domain of the institutional investors, and you can’t compete with their availability of funds. After making many property transactions, you may find, as we did, that mid-size apartment buildings are the right niche.
APARTMENTS-THE COMING BONANZA FOR YOU
Supply and demand play an important role in residential income property value. The demand for rental property is increasing because the number of people entering the rental market is increasing steadily each year. At the same time, construction costs, stricter zoning ordinances, and environmental factors are limiting the new construction of residential income property. Together, these trends bode well for investing in residential income property.
Because the 1997 tax act allows joint owners to exempt capital gains of $500,000, more and more people are selling their homes, saving their money, and moving into rental property. It is estimated that the demand for rentals is likely to increase over 10 percent during the next 10years. Residential income property offers one of the best protections against inflation. In fact, a study reported by the Journal of Financial Economics found that residential real estate is the only investment that offers a complete hedge against both anticipated and unanticipated inflation.
People always need the three basics-food, clothing, and shelter. As the population grows, the need for shelter grows along with it. The hedge against inflation with residential rentals is greater because, unlike long-term commercial leases, they are generally on a month-to-month basis. As prices increase, apartment owners can increase rents more rapidly with month-to-month leases than commercial owners who have long-term leases.
Low-rise developments or garden apartments, midsize apartment buildings, in suburban communities account for more of the buying and selling transactions than luxury apartments (which have a much smaller market). Seven out of ten millionaires made their money in real estate. Shelter is not only vital, but it’s often the greatest part of a person’s net worth.
A midsize apartment is one type of investment that is a source of security and stability. Every investment has peaks and valleys, including rental real estate. But over the long-term, it always comes out on top. The key is knowing the right time to buy and sell. That is the golden rule in investing. This book will give you the knowledge you need to invest at the right time and right place.
REAL ESTATE: THE SHOCK ABSORBER
Real estate generally outperforms equities because of its higher yields, greater price stability, and downside protection even in a recession. When stock markets are down, real estate holds value and produces a positive return. Real estate is less prone to booms and busts than in the past. Residential income-producing real estate is now stronger than it has been in many years.
Since apartment investments can be seen and touched and are not an abstract form of ownership evidenced by a piece of paper-they are investor friendly. People can identify with doors and windows, bedrooms and bathrooms, and floors and roofs. They don’t feel that the market is being manipulated by programmed buying and selling. They feel they have control over their investments.
Shelter is one of the basic necessities of life. You can’t comfortably sleep on gold, silver, or stock certificates, but you can stay warm and dry with a roof over your head. There will always be a need for housing. And midsized apartments fit the bill.