Benefits of Real Estate Investing Part II
A few weeks ago I posted about five of the top benefits of real estate investing. Although those five are all great benefits, there are many more that come with owning real estate. Today I've decided to share another five benefits of owning real estate. Without further ado, here we go!
Leverage - By owning real estate you can leverage your investment capital. When buying stocks, bonds, cryptocurrency, or other investments you are limited by the cash in your pocket. In real estate, you can use long term bank debt to buy larger properties that have greater cash flow and higher appreciation. Lenders will often lend 70-80% of the purchase price of an investment property, I even recently did a new development deal with a lender who funded 100% of the purchase price + construction. If you purchase right, the income from the property will cover the bank debt and give you cashflow. This should you with an asset that is worth 3-5 times more than what you would have been able to afford otherwise.
Appreciation - as a general rule, real estate increases in value over time. This is what is known as appreciation. This trend is expected to continue as it was recently revealed that they are not making any more land. But seriously, I’m sure you’ve heard the news stories of housing shortages all over the country. More people are being born and moving into this country everyday and the demand for housing is outpacing the new supply. In addition to standard appreciation, many real estate investors employ a strategy known as “value-add” where you “force appreciation” from a property by fixing it up.
Scalability - Many real estate investors own multiple units and benefit from “economies of scale”. This is the same strategy used by large stores that have multiple locations. As a general rule, the larger your business grows, the cheaper your operating cost will be. As you acquire more rental units, your management or repair cost will still go up, but at a lower rate compared to the new income you’ll receive. Large apartment complexes are able to utilize economies of scale to save on maintenance, management, and many other expenses. These savings are passed on to investors like you, who benefit directly from this scalability.
Cash Flow - Real estate, unlike many other forms of investing typically produces PASSIVE monthly or quarterly cashflow which is distributed to investors. This allows investors to directly benefit from their investments every week, month, quarter, or whenever distributions occur. When investing in something like stocks or bonds, typically gains are only realized at the sale which means that you have to sell your investment in order to enjoy the profits. But wait? Don’t dividend stocks send checks every quarter? The answer is yes, however real estate typically offers a much higher rate of cashflow. Popular dividend stocks typically offer a dividend yield of 3-6% while commercial real estate syndications tend to offer cashflow that is 8-10% or higher!
Equity and debt pay down - Remember how we mentioned leverage earlier in this article? Debt pay down is the other side to that coin. When you buy a property with leverage, you borrow money from a bank that needs to be paid back. If you’ve invested in a real estate deal, that debt is typically paid down by tenants. This is value that is being created in addition to the appreciation and cashflow you receive. Although you don’t see that cash in your pocket every month, your equity stake in the property increases with each payment. This equity can be accessed through a refinance where you pull money out of an investment to use for additional investments.