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Despite rising interest rates, real estate remains one of the truly great small business opportunities out there. Indeed, real estate is an incredible investment, a great business, and a fantastic one-person moneymaking machine – all in one.
I don’t say any of those things lightly, but they are true. Buying, owning, keeping and then trading up investment properties is a well-established, tried-and-true, solid small business.
This is so for several reasons. The main one is called leverage, and it really is the pixie dust of real estate investing.
Read on to see why you should consider investing in property instead of big-name stocks.
1. Leverage
Let’s do some math:
Say you want to buy 1,000 shares of Apple stock, which, as of today, is trading at $162 a share. Those 1,000 shares would cost you about $162,000.
Ouch.
Now do the same math with a piece of real estate that is selling for $162,000. As a small business, you are not required to put 100% down to buy that property. Instead, the down payment would likely be about 20%, or about $30,000. The bank would loan you the rest, $132,000.
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But who cares? For $30,000, you would own something worth $162,000. That’s called leverage, and that’s what can make you rich. You leverage your 20% down into 100% ownership. That means that you get 100% of the appreciation of the property and 100% of the rents it brings in, not 20%.
Do you see how amazing that is? For that same $30,000, you would own less than 200 shares of Apple. Name me another business or investment where you can put up only 20% and own 100%.
Something to note: Mortgages for investment properties, also called “non-owner-occupied,” are a tad different from your traditional homeowner residential mortgage. Rates for non-owner occupied loans can be higher, down payments may be a bit more, and loan terms tend to be shorter.
Beyond leverage, there are four other ways you can make money with a real estate business.
2. Cash flow
In real estate, the rental income from the property is your cash flow. The more units you have, the greater your cash flow. If you buy the right piece of property, not only will your rental income cover the property’s mortgage, but the extra cash flow will be your profit.
Similarly, if you buy a property with below-market rents and that may need some upgrades, you can do the upgrades, increase rents, and thereby increase both your cash flow as well as your equity (because the property will be worth more after the upgrades.)
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3. Appreciation
As indicated, your equity in the property grows as it appreciates. If you look at a graph of real estate prices, it almost always eventually heads up (with, of course, some bumps along the way.) But what this means is that the value of your investment (your business) will increase, simply because of the passage of time.
4. Tax deductions
As with any business, expenses related to your real estate business are tax-deductible. That would include interest paid on your loans, utilities, property insurance, property taxes, upgrades, upkeep, property management fees and supplies. Even better: All upgrades further increase the value of the property.
5. Bigger and better properties
With increased equity, you can always qualify to get into bigger buildings.
Check it out:
Uncle Sam likes when investors upgrade into nicer properties because that helps the economy and creates extra taxes. As such, you need to know about something called a 1031 exchange. A 1031 exchange is a government tax incentive program that allows you to sell a piece of property, trade up into a bigger property, and not pay taxes (aka capital gains) on the profit until the end of your investment career when you will finally have to pay up.
But by then, you could be wealthy enough that you won’t mind that much.
Real estate businesses: They don’t cost, they pay!