Are you scared to have your money in the stock market, but also experiencing almost no return on investment with your money at the bank? Do you instinctively like the idea of being invested in income producing real estate with results you can see?
Set your mind right about earning money. More cash = more freedom! Money itself won’t make you happy… HOWEVER, it will give you the ability to provide a better life for yourself and your loved ones.
BOTTOM LINE: Invest with income streams that give you positive cash flow, learn to leverage your debt, learn to handle inflation and take control of your physical assets. Here are eight reasons why investing income producing real estate is an excellent choice for protecting and growing your wealth:
One of the biggest benefits to income producing real estate investments is that leases generally secure the assets. This provides a regular income stream that is significantly higher than the typical stock dividend yields.
2. Using leverage to multiply asset value.
An important characteristic of commercial real estate investing is the ability to place debt on the asset, which is several times the original equity. This allows you to buy more assets with less money to significantly multiply asset value and increase equity as the loans are paid down.
3. Low-cost debt leveraged to multiply cash flow.
Placing “positive leverage” on an asset allows for investors to effectively increase positive cash flow from operations by borrowing money at a lower cost than the property pays out. For example, if a property generating a 6% cash-on-cash return were to have debt placed on it at 4%, the investors would be paid 6% on the equity portion and approximately 2% on the money borrowed, thereby leveraging debt.
4. Hedge on inflation.
For each dollar that is created, there is a corresponding liability. Real estate investments have historically shown the highest correlation to inflation when compared to other asset classes, such as the S&P 500, 10-year Treasury notes and corporate bonds.
As countries around the world continue to print money to spur economic growth, it is important to recognize the benefits of owning income producing real estate as a hedge against inflation. Generally speaking, when inflation occurs, the price of real estate, particularly multi-tenant assets that have a high ratio of labor and replacement costs, will also rise.
5. Capitalize on the physical assets.
Income-producing real estate is one of the few investment classes that, as a hard asset, has meaningful value. The property’s land has value, as does the structure itself, and the income it produces has value to future investors. Income producing real estate investments do not have red days and green days, as does the stock market.
6. Maximizing tax benefits.
The US Tax Code benefits real estate owners in a number of ways, including unlimited mortgage interest deductions and depreciation accelerations that can shield a portion of the positive cash flow generated and paid out to investors. At the time of sale, IRS allows investors a 1031 provision, allowing investors to exchange into a like-kind instrument and defer all taxable gains into the future. (See your tax advisor for full explanation.)
7. Asset value appreciation.
Over time, more and more inflation has made it into the economy, drastically reducing purchasing power. However, income producing real estate investments have historically provided excellent appreciation in value that meet and exceed other investment types. Properties historically increase in value on a minimum at a par with inflation, and also as the net operating income of the property improves through rent increases and more effective management of the asset.
8. Feeling the pride of ownership.
The right property in the right location with the right tenants and ownership mindset can produce a tremendous pride of ownership factor that is highest among all asset classes. Homeownership is out of reach for most people. Imagine owning multi-family housing units instead?
No one can ensure the future of rental income property values. However, this asset class seems positioned to continue to be a powerful investment option for those ready-willing-and-able to do the work to achieve the results.