Income properties are the best and most underutilized investment vehicle available to middle America. They are the best because they offer income, capital preservation, tax benefits and appreciation all in one comprehensive package. They are the most underutilized because regular folks don’t know where to find investment opportunities, think it’s just too hard or consider it too much hassle. When done correctly, investing in income producing real estate is a thing of beauty and I will give you 10 damn good reasons why you should own some.
1. No rollercoaster fluctuations
I’ve got nothing more to say on this except that unlike your 401(k), your investment real estate will not do this:
2. Captured Equity
Due to the combination of plentiful foreclosure inventory and motivated sellers, deals below market value are within reach. We are seeing some foreclosed properties being sold at 20-40% below their true market value. Acquiring these properties at this time would essentially capture this significant level of equity (difference between price paid and market value) that the investor would cash in on when they sell or refinance the property. This one characteristic is hard to match by any other investment vehicle outside of running a pawn shop and who wants to do that?
3. Steady Cashflow
Houston is a very particular market when it comes to investment properties. Despite the fact that we have one of the largest property tax rates in the country, investment properties here break even when purchased at retail price. That means, if you were to purchase a property for $100k that was worth $100k, the incoming rent would cover the expenses of the property in full (in most cases), unlike in the majority of US markets. Now, if in the case of paying retail you break even, that means that if you get a deal, you have .. positive cashflow. What kind of return on investment? Cash on Cash Returns (cashflow over cash investment) we are seeing are in the range of 12-25% per year. Can your investment advisor beat that with any kind of consistency?
4. Tax Benefits
By definition, the IRS does not love many things, but they do have a soft spot for investment real estate. From allowing the paper depreciation of an appreciating asset, to deferred tax like kind exchanges and deductability of most expenses investment real estate certainly gets the royal treatment from the alphabet boys.
Given that I’m no Nostradamus, I can’t predict what future appreciation rates will be for our area. But looking at historical data, Houston real estate has been appreciating at a pace of 3-7% per annum pretty consistently. Even if you take a conservative approach and just call it 3%, it definitely ads up for the long term investor (and there’s really no other kind). Based on our median sales price for instance, that’s a jump in value of about $5,000 per year.
6. Additional Equity through Debt Paydown
As you collect rent payments your underlying mortgage on the property is being paid down at at rate of about $600-$800 per year. While it’s not something that will allow you to live in the Hamptons for the rest of your life, little by little we’re building up a pretty nice ROI (return on investment) package, aren’t we?
7. Good Management limits hassle
Every time I talk to a client about owning investment real estate, this question never fails to arrive: “But we don’t want to get calls in the middle of the night about a sink that’s leaking”. That my friends is old skool landlording and it’s no fun. If you buy the right properties and hire a professional management company or in lieu of that, put a system in place to deal with repair concerns in a disciplined manner, you limit your hassle to watching checks flow in.
8. Favorable landscape
Stars are aligned in favor of investment real estate right now: Low interest rates combined with great deals on foreclosures which happen to be plentiful. Fertile ground like this is very uncommon. In the eighties we had foreclosure deals abound but interest rates were in the double digits. In the early to mid 2000s, interest rates were low but prices were at their highest. It is very rare for conditions to come together like this so if you were thinking about taking action, the time would be now.
9. Earning 0.5% Interest in your Savings Account sucks
I know everyone has been in a sort of survival mode as of late, but still there’s no getting around the fact that earning 0.5% interest in your savings account is a Dyson – it never loses suction. Inflation is at 3% for crying out loud – your money is losing money right now when it could be doing so much more in a safe and secure investment. If it’s not sleep-at-night emergency money, a savings account is no place to be right now.
10. Wealth Building
Did you know that a large portion of the overall wealth in this country was built in real estate in distressed times like these? Visionary individuals that had the outlook or the good sense to partner with the right people, stood in the sidelines until opportunities like this presented themselves and they pounced. When you acquire the right properties, in the right growth prone locations at the right discount, cashflow income on 4-5 properties is over $12k a year, the captured equity amounts to six figures, while debt paydown, appreciation and tax benefits just sweeten the deal further. Take a look at real estate and then compare it with your current wealth building method. Be honest: Is it even a contest?
That’s all I wrote. If you have any comments, or just want to call me an idiot, please leave them below.
[This was originally posted in ErionHouston.com in August 14, 2009]