Becoming A Real Estate Investor
Great Reasons to be a Real Estate Investor
Pacific Beach Real Estate, Mission Beach Real Estate, San Diego County Real Estate
According to the U.S. Census Bureau, 75% of individuals who invest in multi-family properties are over the age of 45. Over half of these people own less than 5 units and they earned approximately 31% of their income from ownership of rental properties.
These statistics may be surprising but, here is a logical reason. Most real estate investors enter the market later in life because they are concerned about their retirement and are also at the period of highest potential earning power. Additionally, some have inherited money or real estate.
Essentially, there are four main reasons why investors choose real estate as their wealth vehicle.
- Cash Flow: Many people assume that the days of achieving positive cash flow are "history". Not true! Selecting the best location, deciding on a property that is in good condition, having a favorable rental market, and making the purchase at a smart price will help to ensure that your property can and will generate a positive cash flow.
- Appreciation: Again, location of the property means absolutely "everything". In many parts of the country, one could safely assume between 4 to 6% annual appreciation. For San Diego, the past several years have been exceptionally good ones with average annual appreciation exceeding 10% for the entire region. One segment which has enjoyed steady and almost torrid appreciation has been beach vacation type properties (those which rent on a weekly basis) where appreciation has exceeded 12 to 15% annually. Obviously there is no way to predict that this appreciation rate will continue but, on the other hand, there is no reason to doubt that it will not.
- Equity Build-Up: You reduce your mortgage and increase your equity with every monthly payment made on the underlying debt. A portion of each payment goes toward reducing the principal and the shorter the loan period, the faster your equity builds.
- Tax Savings: Generally, the IRS allows investors to deduct interest on the debt, property taxes, rental related operating expenses, depreciation, uninsured casualty losses, etc., which again, effectively increases net cash flow.
While you no doubt like hearing about all the good financial reasons to hold investment property, I would be less than candid if I did not point out that the government needs to pay their bills and may "nick" you for a few dollars when you sell one of your investments. When you sell an investment property, you may be faced with a 15% capital gains tax on the increase in the value of the property and the recapture of the depreciation. However, this cost can be deferred if you execute a Tax Deferred 1031 Exchange in which you "trade up" from property to property.
All of this may sound like a lot to digest but, at the end of the day, having at your disposal a well educated and experienced team to assist and advise you is of critical importance. Choose a real estate professional who understands the investment market and who has an established relationship with a local property management company who in turn can accurately help you estimate rental income, expenses and cash flow.