Whether the US market is booming or busting, there is one kind of market where you can always find deals and make money: the real estate market. This market is arguably the best market that a person can seek to invest in, and in this article, we are going to outline the reasons for why that is.
Furthermore, we will show you some of the myriads of ways that you can get your feet wet with real estate investing. Another thing that makes the real estate market so great to invest in is that you actually don’t need a lot of money to get started, which makes it great for young people.
Reasons Why You Should Invest in Real Estate From a Young Age
As I mentioned above, real estate is arguably the best investment that an investor can make. This is because real estate does three (and maybe four) things:
- It generates cash flow.
- It builds equity.
- It allows for depreciation.
- It can potentially appreciate in value over time.
Furthermore, if you decided in your twenties to invest in real estate directly through rentals and the like, many young people are actually able to qualify for a Federal Housing Administration (FHA) loan that only requires a 3.5% down payment and has a traditionally low-interest rate. That makes the real estate market really accessible for people who may not have the 20% down payment that a bank would charge for a mortgage!
Real Estate Produces Cash Flow
Cash flow is, by definition, the movement of money via revenues and expenses. Real estate investing provides an investor with the opportunity to generate positive monthly cash flow. If you directly purchase a property and then rent it out to tenants, it is highly possible that the rent you charge will pay off all of the monthly expenses for the house and even chip away at the mortgage for you. On top of that, you may get to keep a little bit of positive cash flow for reinvesting each month! Of course calculating your monthly expenses and accurately forecasting how much you can charge in rent prior to purchasing any property is critical to making sure that the properties you purchase will be cash flow positive.
Real Estate Builds Equity
As that cash flow is continually generated, your mortgage on your property will be paid down a little bit each month. Over time, as those mortgage payments begin to chip away at the principal of the loan, you will accrue equity in your property. This equity can be used as a store of wealth, as a back-draw for loans, and even as collateral in other types of agreements.
Real Estate Can Be Depreciated for Tax Purposes
This is where purchasing real estate becomes really exciting. The government currently allows a commercial property owner (someone who buys properties for investments) to depreciate their property over a designated time period. This depreciation can be applied against one’s tax bill each year in the form of a deduction.
Imagine for a second that you are in the 28% tax bracket and you are able to use $20,000 of depreciation from your property to offset your tax bill. That is a $20,000 reduction in taxable income which translates to a $5,600 tax reduction!
It is this principle of depreciation at work in real estate that really leads investors to think of investing in real estate as & quot; generating money out of thin air & quot;, which is sort of what depreciation is.
Real Estate Can Appreciate in Value
Finally- the icing on the cake. If you are able to purchase properties in the right price and at the right time in the right locations, you will find that those properties will appreciate in value over time. While this appreciation can’t always be expected, it is possible that your equity in the properties you own will increase as a result of appreciation.
How You Can Invest in Real Estate
Now, all of the benefits that I have just described have mostly applied to rental real estate, which is sort of like the & quot; ultimate form & quot; of real estate investing because it offers so many perks. However, not everyone is cut out for being a landlord and managing tenants. With that said, there are a couple of other ways that you can invest in real estate without having to manage it directly.
Real Estate Investment Trusts (REITs) are publicly or privately traded shares that allow a person to gain access to some of the benefits of real estate investing without having to manage properties directly.
In fact, many REITs actually trade on a stock exchange just like ordinary stocks. Typically, a REIT is a real estate investment company that invests in properties and then passes along a portion of the profits to shareholders, who are sort of like limited partners.
REITs are regulated under the Investment Company Act of 1940, and there are a series of rules that their management teams are required to follow such as keeping to strict financial reporting standards and the like. These requirements are generally meant to keep investors safe, but please know that investing always involves chance of loss.
Direct Partnership Plans
Direct Partnership Plans, or DPPs, are another type of investment that allow investors to get in on real estate (as well as other sector) action without having to directly manage anything. Under this type of investment, an investor will subscribe to being a limited partner with an investment firm.
That investment firm, made up of general partners that manage the day-to- day activities of the firm, will aim to fulfill an investment objective as laid out in their prospectus. Limited partners (i.e. you) are allowed to share in the profits (and losses!) of the partnership but are limited only to losing their principal investment.
General partners are encouraged to manage the business well, because they usually have much higher liability than a limited partner if the business fails. Also, limited partners are not allowed to be involved with the day-to- day activities of the investment company or they could lose their rights to their limited partner status.
All That’s Left: Pick What’s Right For You
Of course, there are a few more types of real estate investments out there, but most of those go beyond the scope of this discussion. What we have outlined for you here are the most basic types of real estate investing and how you can get involved in (and profit with!) those methods.
All that’s left is for you to decide which style of investing suits you best, to discuss that decision with a trusted financial advisor to determine your risk tolerance, financial objectives, and time horizon, and then go from there!