You frequently hear about people who made their fortunes investing in the stock market, but you also hear about investors who lost their shirts playing the same game. You hardly ever hear about real-estate investors who go bankrupt, however; that's because it doesn't happen often.
That's right: Those individuals who invested wisely in real estate many years ago are living a very comfortable lifestyle. Investing in real estate can garner interesting returns, so if you're just getting started or have considered investing in real estate, the information that follows is invaluable.
Take the risk
Much like starting your own business, investing in real estate requires entrepreneurial skills and a vision, which is why not everyone is jumping on the real-estate bandwagon.
What should you expect?
Investing in real estate requires a lot of time; you need to deal with a vast array of tenants -- good ones as well as bad. Just like a business, you also have to deal with operating and fixed expenses, such as heating bills and renovation costs.
The benefits
Cash flow
Cash flow is the difference between your income and your expenses on a piece of property. You can have a positive or negative cash flow. Obviously, you'll feel a lot better if the cash flow is positive.
Appreciation
Appreciation is the increase in value of a property. There are two kinds of appreciation. The first is from economic conditions beyond your control, such as inflation. But you won't gain much from this type of appreciation since the gain is offset by the higher cost of living.
The second kind is market appreciation, which you can control. When you improve a property (through renovations), you force its value higher. You can purchase a piece of property in need of repairs and bring it back up to neighborhood standards or slightly higher; this will give you a property that is much higher in value.
Leverage
Leverage is the ability to borrow a percentage of the value of a piece of property. Real estate, in comparison to other investments, offers a very high degree of leverage. In some cases, a couple buying a single-family home can obtain 95% financing. This allows individuals to purchase real estate with little, if any, of their own money. What other investments offer such a high degree of leverage?
Amortization
With leverage, or the use of other people's money, comes a repayment schedule. Your outstanding balance is reduced with every payment you make. Part of each payment goes to interest (applied first) and the rest goes to pay off the principal. The principal reduction is called amortization -- reducing debt. Hence, amortization can make you wealthy, slowly and steadily.
Tax advantages
Owning real estate with the goal of making a profit allows you to deduct interest payments and other expenses come tax time. But don't be fooled into buying real estate for the tax advantages; rather, purchase it because it makes economic sense to do so.
Source: www.askmen.com
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