Property Investing Secrets - Why Property Is The Ideal Investment!?
As a young investor you may be more focused on the rise in capital value; whereas
someone in their golden years can be more focused on generating income. Property is one asset class that does both, rising in value and generating income. It is often referred to as the "IDEAL" investment. "IDEAL" is a simple acronym that highlights just some of the key benefits of owning real estate:
1. Income
One of the key benefits of property investment over many types of investments is its inherent ability to generate passive income. When investing in property the key thing is to focus on net income. Many real estate agents will quote gross yield figures i.e. the annual rent as a percentage of the property price. Whilst this is a reasonable indicator of your potential return on investment, I prefer to focus on net yield or net income. You absolutely must have net positive cash-flow otherwise you haven't got an investment on your hands but a burdensome liability. The challenge in property investment is to minimise the down payment (which will maximise your mortgage) whilst at the same time generating positive cash flow each month.
2. Depreciation
A rental home is seen as a depreciable asset just like a car or piece of factory machinery. Rental properties with positive cash flow can show an accounting loss, granting the owner a tax deduction, or, as Robert Kiyosaki calls it, "Phantom Cash Flow". Depreciation is an accounting loss and only shows up on paper. It can result in you being able to turn a small economic profit into a small tax loss. So, even though you could be "loosing" money on paper you could actually be making a monthly cash profit.
The building value (Purchase price - Land Value = Building Value) of residential property is usually depreciated over 27.5 years. Commercial property is usually depreciated over 39 years.
3.Equity Build Up & Expenses
As you pay down the principle of the mortgage loan you are gradually building up your equity stake in the property. So, even if there is no increase in the value of the property over the term of the loan you still end up with an asset with 100% equity at the end of the mortgage loan term.
Expenses such as property management fees, maintenance, insurance, mortgage interest etc., are deductible from the rental income, thereby reducing your tax liability.
4. Appreciation
Your asset should appreciate in value over time. Often the largest part of a return on an investment in real estate is in the appreciation in the value of the asset and the resultant gain in equity. Property prices can sometimes reduce in the short term due to changes in demand, access to finance, etc. but over the long-term you will benefit from appreciation.
5. Leverage
Leverage is the principle of using a small amount of your own money to control a large value asset. One of the unique aspects of real estate over other investment classes is your ability to borrow up to 80% or 90% of the purchase price of the asset. This is leverage i.e. using Other People's Money (OPM).
By fully understanding and utilising these characteristics of property investing you can take advantage of this powerful investment asset to build wealth quickly and get rich fast.
by: Keeks Cunningham
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