Many people think of real estate investment as a slow-moving, slow-to-appreciate market. However, smart investors know there are numerous misconceptions and hidden truths surrounding real estate investments. In this article, we will debunk some common myths and shed light on the various benefits of smart real estate investing.
The Benefits of Real Estate Investments
- Investment Appreciation: Contrary to the belief that real estate is a slow-appreciating investment, properties can experience significant appreciation, especially in strategic locations. Real estate value is driven by factors such as development, neighborhood improvements, and economic growth.
- Investment Is Secured: Real estate investments are secured and backed by hard assets, providing intrinsic value. This intrinsic value makes real estate more resilient against market panics due to its inherent illiquidity. Investors find comfort in knowing their investment is tied to tangible assets.
- Invest for Cash Flow: Multi-unit rental properties like apartment buildings offer more than just cash flow. They provide income stability and diversification, making them a reliable source of returns. Investing for cash flow ensures a steady income stream, contributing to long-term financial success.
- Passive Income: Real estate investments generate passive income, particularly in rental properties. Making money while you sleep is a crucial principle in wealth building. Acquiring cash-flowing assets that produce consistent income passively allows investors to build wealth over time.
- Return on Equity: Equity creation, or “forced equity,” is achieved by increasing revenue or decreasing expenses in multi-family assets. This approach enhances the equity stake in the property for owners. Strategic investors leverage this equity growth tax-free, allowing for reinvestment and further wealth creation.
- Tax Benefits: The increasing value of real estate results in a higher equity stake for owners. If there’s a loan on the property, it’s considered beneficial debt, as tenants essentially contribute to its payment. The combination of rising property values and loan paydown contributes to the simultaneous growth of equity, which is tax-free.
Additionally, you can use depreciation to offset income from the asset. Also known as “a phantom return,” depreciation is an annual expense deduction that is taken on paper without actually incurring the expense. This deduction is typically a percentage of the value of the property that you can write off as an expense against revenues.
Inflation-driven rent increases maintain positive cash flow, even when a larger refinance loan replaces the previous one. The proceeds from this new loan allow owners to reposition the monetized equity, shielding it from market fluctuations. This tax-free equity can be utilized for property improvements or invested in additional cash-flow real estate. Once the initial cash equity is repositioned, the returns to owners increase.
- Pass-Through Entities: The Tax Cuts and Jobs Act of 2017 provides benefits for residential landlords operating as pass-through entities. This unique business structure allows 20% of profits to be tax-free, reducing the overall tax burden. Consulting with an income tax professional is crucial to understanding the limitations and exemptions associated with pass-through entities.
- Profit from Inflation: informed investors navigate this economic landscape adeptly by selecting investments that consistently outperform inflation rates. Savvy investors employ tactics reminiscent of banking strategies, using leverage and hedging to their advantage. Like banks capitalize on arbitrage, investors play a similar game, borrowing funds from financial institutions at fixed rates to acquire cash-flowing assets. The brilliance of this approach lies in the fact that the new asset not only covers the debt payment but also becomes more affordable as the dollar weakens due to inflation.
This financial maneuver transforms investors into their own financial institutions, enabling them to use less of their own capital while maximizing returns. Quality multi-family investments, in particular, become a lucrative avenue as rental incomes grow in tandem with inflation, typically rising by 3-5% annually. Investors benefit from this inflation-driven growth, creating a hedge that shields them from the diminishing value of the dollar. The beauty of this strategy lies in the fact that the bank is owed a fixed payment, while the increasing rental income flows directly into the investor’s pocket, presenting a robust and sustainable wealth-building approach.
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Real estate investing offers many benefits beyond the commonly perceived notion of merely generating cash flow. Savvy investors can build wealth strategically from appreciation and secured investments to tax advantages and profiting from inflation. At Cornerstone Commercial Investments, our skilled management and advisory team provide unique insights into middle markets, backed by decades of expertise. Contact us or visit our website to learn more about unlocking the full potential of real estate investments.