In the wake of the Great Recession of 2009, many people were left wondering if investing in real estate is safe and profitable. We all saw a real estate bubble begin with over-valued homes and then watched the bubble burst, as people lost homes and equity.
In our quest to determine if real estate is a safe and profitable investment, we spoke with Anthony Galeotafiore. Galeotafiore is a seasoned real estate professional. He has been a real estate developer, lender, dealer and consultant. His current interest is in both non-performing commercial mortgages in New York and Florida and designing and building residential and commercial projects. With all of his experience, Galeotafiore brings some unique insights into the discussion.
According to Entrepreneur, real estate remains a great investment vehicle. There are multiple ways that people investing in real estate can benefit, such as through profits, tax breaks, and leveraging. Investors often can benefit from multiple of these wealth-building advantages at once.
Tangible Asset –
Galeotafiore reminds us that one really great thing about real estate as opposed to other investments is that it is a tangible asset, unlike a stock or a new car that will decrease in value or potentially end up worthless. Also, you can purchase homeowners’ insurance in order to protect your real estate asset.
Appreciation –
Of course, the first means of building wealth in real estate that comes to everyone’s mind is appreciation. Forbes reminds us that the investors who are simply counting upon property appreciating in value can get burned. They stated that savvy real estate investors relish such opportunities but do not add a property to their portfolio solely in hopes of appreciation.
Positive Cash Flow –
Forbes stated that it is even better and more dependable in terms of trying to build wealth when you have carefully purchased a property that allows you to garner a rental fee that covers all of your monthly expenses – such as the mortgage fee, property taxes, maintenance expenses, insurance and your property management fees – and end up with a profit. That is called “positive cash flow.”
The great thing about positive cash flow is that you are paying off the mortgage and building equity in the property that the tenant is paying for you. Meanwhile, you are earning positive cash flow as well. This is double wealth building!
Tax Advantages –
One of the great advantages of real estate as an investment is that it allows for tax deductions on your investment, which protects your profits. As Entrepreneur stated, people who purchase rental properties, because those are investments, are able to deduct depreciation from their profits. One can take a deduction of 1/27.5 of the value of the property against the cash flow for the year. As Forbes stated, that depreciation amount usually keeps real estate investors from having to pay any taxes on the cash flow whatsoever. There are also a few other tax deductions available on real estate: mortgage interest, operating expenses, insurance and property taxes. The Trump Opportunity Zones are also a notable tax break for qualified real estate investing.
Leverage Advantages –
The other incredible thing about leveraging is that investors can buy real estate with 20 percent or less as a down payment at often around five percent interest rate. Your tenant pays for your mortgage payment. Once you have earned your down payment amount, you have just doubled your investment!
One caveat here is that The Balance cautions real estate investors to have the ability to make the mortgage payments when you are between tenants, so you don’t end up harming your credit score.
Equity Building –
Each payment by your tenant is passively creating your wealth in terms of equity.
Forbes suggests that, if you would like to be a real estate investor, but you don’t want to field the calls and fix the smaller repairs on the rental property yourself, collect the rents and vet the tenants, you can hire a property manager to handle those chores. Of course, the cost of the services of your property manager is tax deductible.
Forced Equity –
If you have invested in a fixer-upper that is a good choice, you can actually increase the equity. For example, you could add a bathroom to a two-bedroom that has only one bath, or you could add another room to the house. This allows you to take the equity that a future tenant will pay off for you and make it even larger.
A similar means of turning something smaller into a larger real estate investment suggested by The Balance is to purchase a duplex, live in one unit and rent the other to a tenant. You are building equity that you can then leverage into another real estate purchase.
As Anthony Galeotafiore suggests, many of us have become afraid of real estate investing because we incorrectly believe that one can only build wealth in real estate by appreciation, so we think we cannot make money in real estate in certain markets. This is simply not so! Savvy real estate investors make money despite the current conditions in the real estate market due to positive cash flow, depreciation, leveraging and equity building.
