Reason #1 - Necessity
Rental property is a necessity in every community, every city, and every state, everyplace. There will always be people who, for one reason or another, won’t purchase a home and will rent instead. From poor credit, to affordability, to simplicity, to income limitations, to not wanting to own anything, the reasons people have for wanting to rent go on and on. I too was a renter for many years.
As real estate markets fluctuate in different areas, the number of renters versus the number of home buyers will also fluctuate. If the real estate market is active and there is a lot of buying and selling happening, the number of renters will likely decrease. This is because many people, including renters, are buying homes. If the real estate market is slower, the number of renters will likely increase. In one place or another, every human being needs a roof over his or her head.
Reason #2 - Security
The importance of providing for yourself and your family by having a safe and secure job was demonstrated to me from a very young age. This safe and secure job provides a steady income with benefits, a retirement plan, and so forth. Watching as my parents worked, and my own experience from my work history, I also realized the idea of having this so called safe and secure job was actually a myth. A myth you may ask? Absolutely in my opinion!
How did I come to form such an opinion? Think about it for a moment. Most employers hire and employ at will, which means at any time for any reason any day of the week, the employer, or boss, the manager, or anyone in a position of authority, can terminate the employee for any reason. How is this safe and secure for the employee? It isn’t. Employees are usually required by their employers to give at least a two week notice when leaving their safe jobs. The employee is often not granted the same, prior to termination, in order to find another safe and secure job to provide for themselves and their family.
Now, of course, there are times when an immediate termination is necessary. These times might include on-the-job drug usage, assault, any type of abuse, violations of laws, harassment, etc, but these are not the usual circumstances for layoffs in today’s job market. The usual circumstances are often the bottom line of the business and the current market trends. You see real headlines in newspapers and magazines across the country and see it online every day of every week – including this week! And we all know about corporate scandals. In recent years, there have been money hungry corporate executives in positions of power who are defrauding the public and the company’s employees of millions of dollars of pension and income. Think about these actual headlines you have seen in the recent years.
Unfortunately, these events often cost the jobs of many hard-working employees who had nothing to do with the underlying reasons in the first place. They are victims of circumstance. Their families become victims of circumstance too. The domino effect takes hold. People begin losing their homes because they can’t pay the mortgage, or they have to unexpectedly move out of town to look for work, or are left unemployed with no income in the near future. It’s a sad reality. It’s also a very scary reality.
I believe it is a myth to think your job, or the jobs of your loved ones, are ever 100% secure and safe from the realisms of the corporate, credit, financial, professional, and business worlds. Life often proves it is rare to find anything guaranteed, besides taxes and death.
So how does the average American ever really get ahead of the game of life? Are you ever able to say to yourself, “My financial future really is safe and secure!” Yes, you can. I believe based upon my experience, real estate investing can afford you the opportunity to move beyond the rut of the 40 hour work week. Maybe not tomorrow, or next month, or next year, but in the future, when it really matters, should you chose this path, allow yourself the time to pursue it, and then work for it. Do something. You can make it happen! This can be your reality. This is true security.
Reason #3 – Passive Income
Let’s say you are the middle aged hardworking American with your safe and secure job. My reference to an American includes all people who live and work in this wonderful country, legally, and it includes all cultures and customs. Real estate investing success is not dependent on heritage or culture. I also do not distinguish between male and female because a person’s gender will not prevent him or her from becoming successful in real estate investing. Anyone can do this, really.
So you have a safe and secure job where you work 5 days a week. This is called active income. You must show up and work if you want to get paid.
If you purchase 1 rental home this year and hold onto it for the long term, without refinancing, keeping it rented most of the time, you can expect to own the home free and clear in about 30 years, depending on the length and terms of your mortgage.
This means at the time you are retiring to celebrate your golden years, or much sooner in some cases, you will own this rental property free and clear and have a steady stream of monthly income. This is called passive income. Passive income is money that comes to you time and time again without you showing up for it.
Yes, you will have had to do something at some point to create passive income. Maybe you had to take 20 hours to learn about real estate investing. Perhaps you had to put in another couple hours to paint the house. All in all you might have more than 50 hours in this home during your ownership years. Who cares? The bottom line is you are not going to work at it every day for 10, 20, 30, or even more years! This is the difference between active income and passive income. Passive income shows up for you without you showing up for it!
Reason #4 - Retirement
Retirement, in my opinion, is not about depending on Social Security or your family for your financial survival. Did you know as of 2006, approximately 90-95% of people at retirement age are still dependent! This is an easy statistic you can find in about 1 minute of searching the internet. Most retirees are dependent on family members, children, their job, or the government for their financial support and survival. This is a very unfortunate fact. Work all your life only to be dependent in the end?
The stability and longevity of Social Security in 2011 is threatened probably worse now than ever before in history. It is chaotic and frankly I would not like to be responsible to fix it. I have the utmost respect for the lawmakers in Washington D.C. who are trying to stabilize Social Security and keep it going for the next generations.
I would not be comfortable retiring in 2011 if I had to depend on Social Security for my income and survival. What about years from now though? At least Social Security is still around this year! Who is to say with any certainty Social Security will be in place next year, five year from now, or 10 years from now? Maybe so, maybe not, we really don’t know nor should we assume anything. What we do know is we can take advantage of the time we have now to formulate a stable plan for income and survival during our retirement years.
Retirement should also not be about worrying every day about your 401k or other savings running out and thereby being forced to penny pinch everyday. Take a look at how the financial advisors will tell you to plan. They want you to budget, save, plan, and not overspend so you have enough money to outlast your life. Die before you run out of money? Is this serious? You bet it is.
Don’t get me wrong, I have nothing against financial advisors, and great ones are worth their weight in gold because their guidance and knowledge can truly make you a lot of money over time. My point is not the people involved but the way the planning system is taught and just accepted by most.
I am not saying to put all your efforts and money into the real estate market and hope for or wish for a successful outcome. You should have multiple streams of income, so if one should start to slow, other streams can continue to produce. You may not receive rental income every month because you will inevitably have a vacancy or expense to cover. This is a perfect time to rely on your other streams of income to help you get by. Invest in a 401k. Get a Roth IRA. Save money in your bank. Own your own business. Have other investments as well, all with the idea of planning for and securing my future. I will continue to utilize all of these resources as supplements to my real estate income, if and when the time may come to supplement. My main focus continues to be using the time I have now to invest in real estate and grow my businesses.
For example, after it's paid off we’ll say your rental home brings in a passive income of $1,000 monthly. You have this money coming in month after month, year after year, with little additional work on your part. You also own all the equity in the house, $100,000, $200,000, $500,000, whatever the value of the home as determined by the local real estate market or an appraisal, this is the long term building of real wealth.
Reason #5 - Cash flow
Cash always flows but not always in the positive direction. Do you ever notice this at the end of the month? Maybe you notice it before the end of the month!
Cash flow is positive or negative. I suppose you can break even too. Add up the money you bring in every month from all your resources, less any debts and obligations, and if the remaining number is positive, you win. If it’s break even, you need a few more resources or less debt. If it’s a negative number, you really need to fix the breach before your ship sinks! Don’t fool yourself into thinking your ship can’t sink. Have you heard of the Titanic?
If you think back to the passive income example I talked about, you’ll remember the example of owning a rental property for the monthly passive cash flow. Think of this example and stretch your mind. Imagine if you owned not just one house, but perhaps five, 10, or even 20 rental properties. What would your income per month be now? Using the $1,000 monthly income from one rental property, your income on 20 rental properties increases to $20,000 per month. This is $240,000 per year.
Realistically, you will have many many many expenses of owning 20 rentals, and since you are retired and not wanting to spend a lot of your time dealing with the properties and tenants, you will likely have a property manager. Because of these circumstances, we will assume your rental expenses per month are 25% of your gross rents, or $5,000. This may or may not seem high in your local market. Adjust accordingly up or down. You may also not own these wonderful properties free and clear, therefore you have some mortgages. Let’s say your mortgages are another $6,000 per month. Even taking into account the expenses and your mortgages, your net income is still $9,000 per month or $108,000 per year. Who can live on this amount? I can.
Would you be able to use this monthly passive cash flow when you are retired and supposed to be enjoying your life? You are enjoying life because you aren’t worrying about money and penny pinching. This is financial freedom and this is the ultimate goal of investing in real estate now. It’s the goal I embraced years ago when I started real estate investing and it is still my focus today.
Okay, back to the present. When you purchase a rental property today, your initial positive cash flow will usually not be a large sum of cash because you have a mortgage you are paying down, or better yet, your tenant is paying down. How awesome is this? You get take all the ownership advantages and someone else helps you pay for it. The positive cash flow you will have can still provide you extra income every month to pay bills, buy gas (this takes an insane amount of money these days!), go to the store with, and so forth.
Reason #6 - Time
Why does it matter you take the time now and plan for your future financial security and success? Because of continuous improvements in health care and quality of life, the average life span for a normal adult continues to increase. If the life span in 2006 is expected to be in the 70s and 80s for males and for females, what will it increase to in 20, 30, 40, or even 50 years from now?
There are life altering circumstances such as accidents, healthcare concerns and diagnoses, and the unexpected we cannot control for. We have less control most of the time than we think. However, chances are in your favor you will become an aging adult someday. Wouldn’t you like the ability to have some control over your financial future so you may relax, retire, spend time with family and friends, travel, see the grandchildren, play golf, whatever you may choose to do? This was my motivation. Work harder now so I could enjoy life in the future.
Looking back to my prior cash flow examples, I know you’re probably thinking to yourself, “Sure, seems easy, big incomes and all, 30 years from now! What about today?” I understand why you are asking yourself this question.
The formulas as I have exampled, a long-term way of thinking, planning for your future, and actively doing something about it now, is not what today’s society is thinking about nor what most people embrace. We are a “gotta have it now, immediate gratification, no waiting in line” society. Most of the time we don’t care about next week, let alone next year or years from now. Live life today is our favorite saying! I wholeheartedly agree. We should live life today and live it well. A few of us are not going to be granted another day. Most of us are; however, going to be granted many more days, many more years and years in fact. Remember our life expectancy is increasing. The law of averages is on your side.
This is why it is so important to use your time now effectively and form a solid foundation to build on so a financially secure future is not just a dream, it is your reality. By planning right now, you will not be one of the 90-95% of retirees and baby boomers who might be saying, “I wish I would have done more when there was time”.
Reason #7 - Leverage
What is leverage? Leverage is the ability to do more with less. Real estate is one of the best forms of leverage an average person can utilize to get off the sidelines as a spectator and start playing in the game of life. How does this work?
Take for example someone walking into a bank and asking for a loan. Let’s say the person wants to buy $100,000 worth of stamps. How much money will the bank tell the person they will need in order to do this? The answer is probably $100,000!
Now, using the same example let’s say the same person wants to buy a house for $100,000. How much money will the person need to do this? The answer depends on the credit situation of the individual, but most of the time the money down will be between 3.5% - 20%, or $3,500 - $20,000. This is a lot less than the $100,000 the house is worth and the person owns the house! How is this so? This is so because this is leverage.
Reason #8 – Helping Other People
You can help other people by investing in real estate? Yes, you can. There are several ways this works.
One, you are providing safe and secure housing to someone who needs safe and secure housing. Okay, I am assuming it is your intention not to be affectionately known as a slum-lord by providing broken-down real estate! Anyway, you are offering shelter, which is one of the main needs of a human being. This helps people.
Secondly, by helping yourself become financially free, you will in turn be able to donate money on a regular basis to all the wonderful and worthwhile charities in the world.
Third, you are helping your community when you purchase or help others purchase investment property. Neighborhood HOA dues get paid. Cities and counties get their taxes paid. Contractors benefit from the work the property probably needs. Real estate agents get commissions. Utility companies provide services. Neighbors are probably happy the property is no longer sitting vacant and may realize an increase in their own property values if the investor is fixing up the property. There are many other benefits to your local communities!
Finally, because you will be successful and financially free, you will be a healthier, wealthier, and a wiser person who will be able to better provide mentally, physically, financially, and emotionally to your family, friends, co-workers, and everyone you come across in your life!
Reason #9 – Tax Advantages
I am not an accountant and I certainly recommend you check with your own tax preparer on the various tax advantages you might see from your own real estate investing. Some of the benefits I've been able to utilize are appreciation, depreciation, legally deductible expenses, and carry forward losses. Do I understand what all of these are? No way! I appreciate my accountant.
Reason #10 - Education
You don’t have to have a formal education to become a real estate investor. You don’t need a college degree, you don’t need hours and hours of studying and taking tests, and you don’t need to be an accountant, Realtor, or any other type of trained or licensed professional. You don’t need to do any of the above in order to become a successful real estate investor. I know this to be fact based upon my real personal experience. Although I am a licensee now, I personally did real estate investing for years before getting a real estate license.
Now this doesn’t mean sit back, relax, and try not to learn anything! What this means is you don’t have to know everything before becoming a real estate investor. You don’t have to know it all before jumping in to it. The reason you don’t have to know it all is because there are many seasoned real estate professionals and real estate investors who can help you navigate the sometimes chaotic real estate investing waters. One of the best ways to learn is to work side by side with someone who has done exactly what you desire to accomplish.
Reason #11 - Equity
What is equity? In the case of real estate, equity is the difference in the value of the home and the amount owed against the house.
Let’s assume your house is worth $250,000. This is determined by looking at the comparable homes, also known as comps, in your area. The value can also be determined with an appraisal. The amount of your mortgage on this example house is $150,000. The difference is your equity, or $100,000.
This amount is not set in stone. For instance, you may wish to sell quickly, therefore lowering your price, and reducing the amount of equity (money) you will receive when you sell your property. There might also be closing fees, taxes due, real estate commission, and other things that lower your equity (money). Maybe the current market woes have lowered values in your area, thereby lowering the equity in your house.
However, there are also many things which will increase your equity as long as you are maintaining the property. Many of these things we have already covered, such as time. Over time, the value of your home grows. As the value grows, the mortgage amount is decreasing, because your tenant is paying you the rent and you are then paying the mortgage. Your equity grows and grows. Eventually, if you hold on to the house long enough and don’t take any equity out, you will own your property outright without any mortgage. This is known as owning the home free and clear. And even better yet, the value of the house has likely gone up over the many years of paying down the mortgage. This is phenomenal! This is the power of real estate!
Equity grows and grows when it is untouched over long periods of time. Someone else, your tenant, is helping you pay down your mortgage and this is how you become wealthy by investing long term in real estate. Don’t forget the fact that when you bought the house, you probably only put down 10 or 20%, so for the $25,000 or $50,000 you would have spend when looking at the example above, you would now have 7-14X or more this amount in equity! How about that for a great return on investment?
Reason #12 – Permanence
Life is hectic. Luckily, real estate stays put in one place. With few exceptions and Mother Nature, real estate doesn’t go anywhere. Your property will be there tomorrow, next week, and next year, 10 years from now and so forth. I once experienced the power of Mother Nature when she took one of my houses completely away in a tornado. Don’t mess with mother!
Reason #13 – Business Ownership
It is said by many one of the easiest ways to become financially free in this wonderful country is to own your own business. Real estate investing is a business and you should treat it as such.
Real estate gives the property owner many great tax advantages. Real estate investing gives the property owner the same tax advantages plus the tax advantages of business ownership. You get to deduct all your expenses associated with your business.
These expenses may include your home office, computer, gas, phone, fax, travel to real estate seminars, mileage, and virtually everything else you can legally claim as a business expense. These deductions are great for you, the business owner. Many of these expenses are probably expenses you have in your life whether or not you own a business, so why not take advantage them? There are may be more business deductions you will be able to take as well. Please be sure and consult your tax professional for all the best deductions for your situation.
Be sure to remember to keep accurate records of your income and expenses. You may need these records for your taxes or if you are audited by the IRS. I operate under the assumption I will be audited at some time, therefore I always make sure I am keeping specific records.
Reason #14 – Pay for Your Child’s Education
Are you one of the many people (parents) who look at the average cost of a four year college and it makes you cringe and tremble? I just looked today online and found several sites reporting the average cost of a private college around $30,000 per year. The average cost of a public college seems to be about $12,000 per year. I believe these numbers include tuition, room, and board. How can the average person save enough money to pay for this?
Well, considering the average salary seems to be around $40,000 per year, one suggestion to pay for college would be to work about 1.25 years straight through and not spending a dime, to amass the approximate $48,000 someone would need to pay for four years at a public university. But wait, since taxes eat up so much of a person’s take home pay, the same person is going to have to work over 1.5 years to bring in the money needed for our example public university student. This simply isn’t possible.
Another choice, the one most people are forced to make, is have the student or parent take out student loans to pay for college. So, as soon as the student leaves school, the student has amassed a debt load to take with him or her to the real world. Depending on where you look for information and statistics, it seems the average student from a four year public university will expect to rack up about $20,000-$40,000 in student loan debt by graduation.
On a better note, because of the many other advantages of real estate ownership, by buying an investment property when your child is young and holding the property for the long term, you will significantly increase you chance of being able to pay for your child’s education in full. Time is on your side, equity grows, mortgage debt is reduced by the tenant paying rent, value goes up, and best of all you don’t have the tax man taking any of it! You can sell or refinance your house when it is time to pay for college and have the money you need.
So, as an example, look at buying a $100,000 piece of real estate when your child is 5 years old. How much is this real estate worth when he or she is 18 years old? Taking into account a measly appreciation of only 2% per year, the value of the house in 13 years is $129,360.66. A better 4% appreciation would yield a value of $166,507.35! Bingo!
At this time, you can either sell the house (a taxable event) or refinance the house (a non-taxable event) and take out some equity to pay for school. By renting the house for 13 years, you have probably been able to pay the initial $100,000 mortgage down by tens of thousands of dollars, therefore even increasing the amount of money you have at your disposal.
Reason #15 - Fix what's broken
I just saw headlines that indicated about 13% of homes in the US are vacant. Many of these are foreclosures just sitting there for years. Becoming a real estate investor or helping real estate investors buy vacant homes will help fix our current real estate situation.
I admit many of the above reasons and benefits of owning investment property I've discussed could each be a blog post in and of themselves. Some might be too simplistic in my examples and explanations. Hopefully though you've gotten some new ideas you can pass along to your clients or use in your own real estate investing models.