I have been buying apartment properties for almost 25 years. With over 40 transactions in seven states I have bought and sold over $500 million in real estate. By selecting the right properties in the right locations and then being very smart in how you manage the properties, they can produce a number of benefits unmatched by other investments.
Here are nine simple reasons why investing income producing real estate is an excellent choice for protecting and growing your wealth:
#1 Dependable Income Stream
One of the biggest benefits to income producing Real Estate Investments is that the assets are generally secured by nine to fourteen month leases which provide a regular and dependable income stream that should produce positive cash flow higher than typical stock dividend yields.
#2 Multiply Asset Value through Leverage
Another 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 and significantlymultiply asset value. $100,000 can buy $300-$400k in property.
#3 Multiply Cash-Flow with Low-Cost Debt
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. Ie. If a property generates 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 Debt Reduced by Property Income
The debt on the property will be reduced by the income of the property’s net operating income, NOI. NOI is figured by the gross income less all expenses before debt. The NOI will sufficiently fund the debt payments thereby reducing the debt balance and creating equity.
#5 Inflation Hedge
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 treasuries, 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 will also rise.
#6 Physical Asset
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 and green days as does the stock market.
#7 Tax Benefits
The US Tax code benefits real estate owners in a number of ways including no limit 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.)
#8 Pride of Ownership
The right property in the right location with right tenants and right ownership mindset can produce a tremendous pride of ownership factor that is highest among all asset classes.
#9 Appreciation of Asset Value
Income producing Real Estate Investments have historically provided excellent appreciation in value that meet and exceed other investment types. Properties historically increase in value as the net operating income of the property improves through rent increases and more effective management of the asset.
While no one can ensure the future of rents or income properties’ values this asset class seems positioned to continue to benefit from a number of other social economic issues that I will save for another time.
If you have any questions post them in the comments and I will do my best to answer.