According to recent statistics published by the U.S. Census Bureau, 75%
of multifamily investors are over the age of 45. Over half of these
(51.6%) own less than five units, and they earned approximately 31% of
their income from ownership of rental properties.
These statistics may surprise
you, but some logical reasons explain these numbers. Most real estate
investors come to the market later in life because they are concerned
about their retirement and are at their highest potential earning
power, or some have inherited money or real estate; the U.S. Census
Bureau reports that 48% have inherited a home.
There are four major reasons that an investor might choose real estate for investment.
1. Cash flow:Yes, it is
still possible in some parts of the country to have a cash flow return.
In other words after all expenses have been covered: mortgage, vacancy
factor, repairs, property management etc., there still can be some
money left on the table. Most banks will not lend money to buy a
property if there is no hope of a cash flow.
2. Appreciation:As a result of our growing population - a net
gain of one American every 14 seconds, according to the U.S. Census
population clock - we could expect to have a population in excess of
400,000,000 in 2050 compared to today's population of 286,401,757.
Loosely applying the rules of supply and demand, we can rest assured
that with our current immigration patterns as well as our population
growth, there will be a continued need for housing over the next 50
years. You can safely assume a 4% appreciation level. Of course, some
years will better than others depending upon supply and demand and the
escalation of costs and the increased costs of construction and
land/infrastructures. As long as governments keep up major increases in
impact fees for developers, your real estate investments will continue
single family home sold for $23,400 in 1970; in 2000, a similar average
home sold for $169,000. That is an approximate 8% annual increase. Of
course, appreciation will vary with the location and condition of the
property as well as the condition of the local economy.
3. Equity build-up:
You reduce your mortgage and increase your equity with every mortgage
payment made on underlying debt. A portion of your payment goes toward
reducing the principal. The shorter the loan period, the faster the
4. Tax savings:
Uncle Sam allows everyone but dealers in real estate to depreciate
their investment properties on schedule E when filing annual tax
returns. Residential properties depreciate over 27.5 years and
commercial over 39 years.
like all of these opportunities to make money. Bear in mind, though,
that the government needs to pay its bills and they get their share
when you sell one of your investments. When you sell a property, you
will be faced with a 20% capital gains tax on the increase in value of
the property and the recapture of the depreciation. This cost could be
deferred if you complete a 1031 tax deferred exchange to trade up from
property to property.
the following example: With $500,000 you can buy a $1,500,000
investment that may give you an 8% cash flow, an annual 4%
appreciation, an annual equity build and a depreciation of $43,000 a
year (1,500,000 X .8 = 1,200,000 (minus the land value); 1,200,000/27.5 = 43,000). This comes in at over a 20% annual return and should make you feel like you have made the right investment decision.
size of real estate investment, you can make a return and build up your
retirement. It is important to not buy the first investment that comes
along; rather you should buy the best investment. Pick an investment
that you are the most comfortable with, maybe your grandmother's
duplex. This will give you a chance to make some small mistakes and
plan a long-term future investing in real estate. Choose a real estate
agent that has some of his or her own investments to help you and a
property management company with good references.
Not all real estate investments have a fairy tale ending. It takes
time, experience and a good eye for location and detail to achieve
these kinds of results. On the other hand they are achievable results.)
Written by Clifford A. Hockley
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