• Cascade Property Advisors

Real Estate Investing for Beginners

Updated: Mar 9

Real Estate has been a great source of wealth for generations. People always need a place to live and businesses always need a space to run their operations from. It was considered a major asset class before stocks and bonds. The world population is growing but Earth is not. So unless we decide to leave Earth and fly to Mars, we are always going to have a growing demand for real estate. Despite ongoing innovations in the real estate arena, new projects tend to be more expensive compared to the older ones. The new building might be better and nicer, but you can rent yours for cheaper and still make a profit.

Benefits To Real Estate Investing

  • Long Term Appreciation. The Case Shiller U.S. National Home Price Index grew on average 3.4% from 2000 to 2019, while the S & P index grew by 4.3% during the same period. However, that comparison is not quite accurate. S&P companies use debt to boost their returns, which gets reflected through S&P index appreciation. In the same way, if a real estate investor uses a loan to buy a rental home, his or her real return can be higher than the home price appreciation because of cheap debt. Historically CAP rates (real estate profitability ratio) in the United States have been higher compared to the mortgage interest. As an example, if your mortgage is 4% and the projected income ratio or CAP rate from your rental is 5%, you will make an extra 1% return from every dollar you borrowed from a bank and invested into your rental. As an example let’s assume that you could have bought a rental house for $100,000 with a $20,000 (20%) down payment in 1990. Based on the average annual 3% price growth of your investment you would be fully paid off in 2020 and would be worth $220,000. In the same example if you would have invested $20,000 in the stock market in 1990 your portfolio would be worth only $169,700 in 2020.

  • Hedge against Inflation. Since the rents keep increasing year over year, real estate income becomes a good hedge against increases in consumer prices.

  • Monthly Cash Flow. Real estate can provide investors with attractive risk-adjusted returns in the form of rents. Investors can enjoy stable predictable cash flow from their properties throughout the holding period.

  • Tax Deduction. Unlike other stocks or bonds, you can write off not only the operational costs of the investment but also depreciation, which increases your after-tax cash flow compared to dividend and interest income.

  • Greater Control. By exercising either direct control over the asset or by hiring an experienced property manager a real estate investor can minimize operational risks associated with the property operations.

Disadvantages To Real Estate Investing

  • Less Liquidity. It can take anywhere from 3 to 6 months to sell your investment property. So if you need money quickly you should think about other alternatives such as an equity line of credit that will give you access to quick cash.

  • Operational Risk. Real estate management might seem very simple, but before considering a self-management option, the investor should make sure they have the time and the knowledge to deal with leasing, rent collection, tenant communication, maintenance and etc.

  • Risk of additional capital for repairs, renovation, or other issues. Real Estate is like a living organism that needs constant care. To maximize your rents you should always fix deteriorating physical structures and update building systems to keep your tenants happy and be in compliance with evolving building codes. If you are planning to invest in commercial real estate, you should always plan for sizable leasing commissions and a tenant improvement budget for new leases and lease renewals.

37 views0 comments

Recent Posts

See All