Today’s REI Classroom Lesson

Marco Santarelli joins us today to talk about why it makes sense to invest in real estate. From appreciation to tax advantages, real estate offers advantages that are different from any other investment.

REI Classroom Summary

For those who are new to the industry or are thinking about getting into real estate investing, this lesson provides a list of advantages that real estate offers for investors.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the FlipNerd.com REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Marco: Hi, I’m Marco Santarelli with Norada Real Estate Investments, and I am your host today on the REI Classroom. Today we’re going to quickly talk about the eight advantages of real estate.
Mike: This show is sponsored by passiverental.com.

Marco: The first one is pretty obvious to most people, and that’s appreciation. You see, over the last 80 years or so, the average price of real estate has gone up continually. Over the long term it continues to go up, and that is because the overall trends have been in lockstep with inflation.
So what are the factors that keep real estate in such high demand over the years? Well, like anything else, real estate is driven by supply and demand, and one of the main reasons is because real estate is a basic human need. We need a place to live, work, and shop, and real estate is an investment that actually benefits greatly from inflation, so in periods of higher inflation, we see real estate values go up. So over the long term, real estate does go up in value and we call that appreciation and I think most people welcome that.
The next advantage is leverage. You see, one of the biggest advantages of real estate as an investment over other asset classes such as stocks, bonds and mutual funds is that you can leverage real estate. Now, leverage allows you to purchase and control a large amount of real estate with a relatively small amount of money. For example, you could easily purchase a $100,000 property with only 20%, in other words, $20,000, and that’s your down payment.
So let me illustrate the power of this. Let’s say you took $20,000 worth of stocks, bonds, gold, whatever, and then over the course of one year, your investment went up by 10%. Your investment is now worth $22,000, and your total return on investment, or what we call ROI, is 10%. That’s not bad at all.
But now let’s take that same $20,000 and use it as a down payment on an income property and buy a $100,000 house. Once again, let’s say the property goes up 10% for the year. Your property is now worth $110,000, an increase in the property’s value by $10,000. Well, you’ve now made a return on your investment of 50% on the initial $20,000 investment. And remember, this does not even include the equity buildup resulting from the decreasing mortgage principle pay down, what we call amortization, the cash flow, or the tax advantages.
The third advantage is financing. You see, unlike stocks, bonds, mutual funds, and other commodities, you can actually get financing for the purchase of real estate. Lenders are willing to loan you up to 80% of the market value of your property. Up until the housing implosion of 2008, lenders were actually even willing to finance over 100% of the value and giving you a nothing-down investment or nothing-down purchase.
So some of you may be saying, “Well, you know, you can purchase or finance stocks.” Well, you can, up to 50%, but what happens when the values go down? You might have what’s called a broker’s margin call and you’ll be required to come to the table with the difference, so it’s not only a speculative play but it also carries a fair amount of risk.
The next advantage is simply tax advantages, and this is huge. With investment property, you’re actually allowed to deduct as an expense, all of the mortgage interest, the taxes, the insurance, the maintenance, the repairs, professional fees, and even deprecation. And with investment property, you’re allowed to deduct these expenses on an unlimited number of income properties, but the real kicker here is depreciation. It is a tremendous deduction that is often misunderstood and underappreciated. You see, this is a paper deduction which means that you don’t need to spend any of your own cash in order to get this deduction. The IRS simply allows you to depreciate the structure, not the land, as if it will be worth nothing at the end of 27 ½ years.
Now, of course, we all know that the property will be worth much more than what you originally paid for it, but nevertheless, on a $100,000 house, assuming for the sake of this example, the structure is worth 80% of the total value, you’re going to be allowed to write off a little over $2,900 in depreciation each and every year for 27 ½ years. That is very powerful.
Cash flow, a properly purchased income property will provide you, the owner or the landlord, a positive cash flow month after month and year after year, and you know, cash flow will carry . . . Well, it carries the property, but it varies from property to property based on variables such as the amount of down payment, the purchase price, the market rent. But when you do buy a property, it has to make sense the day you buy it, and if it doesn’t, then you’ll have to look for another deal.
This could be achieved following simple prudent guidelines which you can define for yourself, and this is obviously what we do every day in our business. Typically it’s wise to purchase property with positive cash flow, and there are only a few exceptions to that rule, but for the sake of this podcast, we’re going to just stick to the positive cash flow rule.
Just wrapping this up, three more advantages. Your tenant pays your mortgage. It’s nice to know that you have someone buying property for you, and that’s your tenant, a unique and very attractive feature about investment property. It’s a solid asset. Real estate is widely recognized as one of the greatest assets to own, and it makes sense. It’s solid collateral. It shows strength on your balance sheet. It can be financed easier than any other asset, and it’s no surprise that most millionaires created their fortunes in real estate or they actually hold their wealth in real estate.
And then I will say last but not least, we’ve got freedom. Real estate requires very little time, small time commitment on your part. There is some management and record keeping each month, but that’s small compared to the amount of time involved in many other assets like buying a small business which can turn you into an employee. You don’t need to follow a daily regimen like following the stock market or anything like that. You can invest and build a portfolio while you have your current job.
So you can clearly see why so many people choose investments in real estate and why the wealthiest people have become wealthy with it. There are very few, if any, investments that can provide you with all the benefits of real estate. It truly is one of the best investment vehicles available to you today, so I’m going to ask you a question. What’s stopping you from purchasing your next investment property?
You see, once you understand the opportunities that exist all the time, all you have to do is make the decision to invest and keep building your real estate portfolio. For more information like this and to go into deeper detail, just visit our website at noradarealestate.com, and that’s N-O-R-A-D-A-realestate.com, and you can get more information. Thanks for your time.

Mike: Passiverental.com is your source for turnkey, done for you rental properties. If you’d like to be an investor and not a landlord, please visit passiverental.com to learn how to purchase cash flowing, professionally-managed rental properties in the hottest rental markets across the country. We can also help connect you with the financing for your next property. Invest the easy way today, and get started by visiting passiverental.com.
Please note the views and opinions expressed by the individuals in this program do not necessarily reflect those of flipnerd.com, its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
Are you a member yet of flipnerd.com, the hottest real estate investing social community online? If not, you can join for free in less than 30 seconds and get access to hundreds of off-market deals, vendors in your market to help you in your business, and you can start networking with thousands of other investors just like you. Get your free account now at flipnerd.com.
Please check out the FlipNerd family of real estate investing shows where you can access hundreds of expert interviews, quick tips, and lessons from leaders across the real estate investing industry. They’re available at flipnerd.com/shows, or simply search for FlipNerd in the iTunes store.

 

Marco Santarelli
Marco Santarelli is an investor, author and the founder of Norada Real Estate Investments -- a nationwide provider of turnkey cash-flow rental properties. Since 2004, they’ve helped over 1,000 real estate investors create wealth and cash-flow through real estate. He’s also the host of the Passive Real Estate Investing podcast.