When I deal with my specialty of real estate which is investment, I get a lot of questions from first time investors curious about the way to proceed. My first job as a specialist who gets entrusted with a lot of cash involves hours of education and I feel like a reporter at times who ask the question, what, where, why, how, and who, and not in that particular order. Today's FAQ starts with why and the need for this is in the statistics of how little money is saved for retirement by the American public. The scary thought is that 1/3 of baby boomers don't have more than $1000 in savings so working with young people for me is especially important since at my retirement age I can quit today and never have to work again to pay a bill. That is the end result of why but let's start at the beginning.
Why buy real estate? To begin with it is simply at this time an investment that can give you the most amount of return for the least amount of risk. Real Estate is a one on one relationship for the investor instead of being bundled and handled in a fund like a mutual fund. Appraisal of value takes in the cost approach of what it cost to replace the property, the comparable approach which compares it to like kind property, and the economic approach which gives you the rental value. There is also historical data we can give on rental rates. When it is financed there is a minimum of 20% down which mitigates downside risk especially after we have done a value reset since 2008. When it is said and down the typical annualized return on investment is 20% per year in Oklahoma City and when you compare that to a conservative stock investment of 4% to 6% per year, you are really building on retirement.
Maybe it's about education: We talk a lot about the problems with student loan debt so maybe for the more affluent folks out there buying one or two homes for you newborn is the best idea. Seventeen years later who can have it paid off and it can be easily borrowed against for offsetting the student loan issue. Think about have assets of $500,000 or more and this becomes the best gift you can give your children.
All my money in real estate? Simply, I don't recommend that. One should be diversified and when I teach investment to REALTORS® I emphasize tax deferred savings also. I do have some people that do almost all of their investments in real estate but for transparency sake I let them know that I don't do that. What I do love is that it really pays when it is done correctly.
Is my profit tax deferred? This is the best part of investing in real estate. You take the improvements less the land and you can write off taxes based on a 27.5 year schedule on residential real estate. What this means for some of my investors is that they make $350 a month net and the depreciation is $375 a month, and this doesn't count write offs in repairs and improvements that are carried forward. Also with a 1031 tax deferred exchange you can pay no taxes when you use the money to buy more real estate. As I joke with my investors, you 1031 until you die and that becomes your biggest tax break, your heirs get to start the depreciation from scratch which is another great gift for your children.
That by no means is all the FAQs on why but it is a start. In the next post we will tackle another question which what should I invest in.