If you're reading this article, you may be serious about building wealth through real estate or you may just want to explore the core concepts further. Regardless, we thank you for visiting OfferMarket, and we hope you find the ideas presented in this article to be insightful, actionable, valuable and worthy of the time you've taken from your busy day.
Our mission at OfferMarket is to empower you to build wealth through real estate. To do this, we provide real estate investors with off market investment property deal flow, fix & flip loans and DSCR rental loans, fix & flip insurance and landlord insurance, and tools and insights to build knowledge and expertise.
Asking why is a powerful way to learn. These are the reasons why people invest in real estate:
Real estate generates rental income. Whether it's a single family rental or a self-storage facility, people pay to use real estate. If the rent they pay is high enough to cover the ongoing expenses to finance, manage and maintain the property, then the property generates cash flow that can be used by its owners for any manner of activity, including buying more real estate!
Real estate values tend to go up over time. It's important to proactively protect real estate using cost effective maintenance, disciplined management and insurance.
One important basis for valuing real estate is replacement cost. Over time, as building material and labor becomes more expensive, it becomes more expensive to build houses. Homebuilders therefore need to charge higher prices for new homes. This serves as a driver for price appreciation of existing homes.
In most real estate markets, where there is not excess supply or low demand from renters, landlords have the ability to increase rent at a faster pace than inflation. Using the income approach to valuing real estate, as rental income increases, so too does the price an investor is willing to pay for the property. For example, if a single family home generated $1,000 per month in rent in 2010 and $1,500 per month in rent in 2020. In 2010 that property may have conservatively been worth $100,000 in 2010 and $150,000 in 2020.
Owning real property sure beats having cash sit in a bank account, and it performs better during periods of high inflation other asset classes.
While the property is generating income and increasing in value, it is also depreciating. The roof may need to be replaced every 25 years, the floors may need to be replaced every 30 years, the furnace may need to be replaced every 15 years. For this reason, the IRS allows real estate investors to depreciate the value of their house (not the land value) over 27.5 years.
If you are financing your investment property with a mortgage, you are racking up thousands of dollars per year in interest expense.
On an ongoing basis, your investment property requires maintenance. Let's say your dishwasher needs to be replaced, or your house needs to be painted. Capital improvements such as a kitchen or bathroom remodel may also be required to keep your property in good condition and optimize rental income.
Depreciation expense, interest expense, maintenance expense, and capital improvements offsets rental income and reduces or even eliminates taxable income.
If you sell real estate, you can do a 1031 like kind exchange and use the proceeds of the sale to purchase a new investment property. This allows you to defer capital gains tax indefinitely while you hold the new real estate.
The value of a high quality asset over time will compound. We met a gentleman who bought a 5 story brownstone in New York City for $100,000 in 1975. That property is worth over $5,000,000 today and generates over $12,000 in monthly income.
Compounding takes time so you need to be disciplined to hold the asset and not sell in fear when prices go down or greed when prices go up.
As Warren Buffett famously said "price is what you pay, value is what you get". Buffett's teacher, Ben Graham, once said "In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
Location, location, location. You've heard this saying countless times. When investing in real estate, you need to truly understand the local market. Here are some things that great real estate investors consider:
Understanding the above points will allow you to understand the risks of owning real estate in a given market. Recognizing asymmetric risk will save you from making the mistakes of buying at all or buying at the wrong price.
Like most infrastructure, real estate is highly capital intensive. Properly structuring your real estate investments will allow you to acquire real estate, optimize its cash flow, and avoid the risks of excess leverage.