Are you young, middle-aged or old? Are you attending college or retired? Are you new to investing or an experienced investor? If you fit into any of these categories, then real estate could offer a good investment opportunity for you.
While this might seem facetious, there are different times and circumstances in which to invest in real estate.
Most of us begin by buying a home for ourselves or our families. This purchase usually constitutes the biggest investment we ever make in terms of dollars. But should we stop there?
For many working people, buying rental real estate offers a way to build net worth and provide stability in retirement. We still make those real estate investments with potential tax forgiveness from Uncle Sam. Depreciation (also called cost recovery) and the deductibility of mortgage interest are two government allowances that can help shelter rental income from taxation. The IRS also might allow accelerated depreciation from tenant improvements made to entice a new tenant or keep an existing one. This could allow an owner to take much of the cost of the improvement to the rental space on a five-year depreciated basis more in congruence with the useful life of the improvement instead of 39 years.
What if you’re a college student and your parents help cover educational costs. Why not ask them to purchase a house or multi-family property you would live in and manage for them? Many parents find the appreciation garnered from holding an asset four to six years offsets part or most of the costs of paying for student rent expenses as well as a portion of tuition. And what better training for real estate investment management than taking care of a property while in school?
For professional real estate investors, owning buildings with net earnings or multiple residential rental units could allow them to accumulate funds for improvements on existing units or the purchase of more rental properties when that makes sense.
The important words here are “cash flow.” Never buy a property when the expected cash flow is negative. Why would you put your hard-earned cash down on an investment that’s only going to cost you on a monthly or annual basis? If you can’t pencil in a reasonable profit on your investment — say at least a 10 percent return before taxes — you’re either paying too much for the property or your down payment is too small. The other consideration is that perhaps the property needs so much work many units are vacant or under rented. Whatever the reason, walk away. It’s not worth the purchase, and nothing is going to change unless you happen to be a contractor and can complete the needed repairs yourself. The adage “your profit is in your purchase” applies here. Buy the property right or suffer through years of property ownership.
At what investing stage do you find yourself ? Are you new to investments? Are you looking for a place to invest excess cash? Do you have a qualified financial planner advising you? Did you inherit funds that should be invested? Do you want to create additional retirement income? These are all indications real estate investment could work for you. Begin by speaking to friends who invest in real estate or a knowledgeable real estate broker versed in investment real estate and ask questions. If you have a good financial planner, that also could offer a good place to start. Dig deep into the issues or problems real estate investors experience. But don’t be afraid to get started.
Note: This column was written for informational purposes only. The author doesn’t know your personal circumstances and makes no representation any investment is right for you. Seek competent tax and legal assistance before making any real estate investment.