Despite rising interest rates, real estate is still one of the truly biggest small business opportunities. Indeed, real estate is an incredible investment, a great business, and a great money-making machine for one person – all in one.
I don’t say any of these things lightly, but they are true. Buying, owning, holding and then trading investment properties is a well-established, tried-and-true small business.
This is the case for several reasons. The key ingredient is called leverage, and it really is real estate investing pixie dust.
Read on to find out why you should consider investing in real estate rather than big-name stocks.
Let’s do some math:
Let’s say you want to buy 1,000 shares of Apple stock, which, as of today, are trading at $162 a share. These 1,000 shares will cost you about $162,000.
Now do the same calculation for a piece of real estate that sells for $162,000. As a small business, you are not required to submit 100% to purchase this property. Instead, the down payment will likely be around 20%, or about $30,000. The bank will loan you the rest, $132,000.
Real estate: The housing shortage is crippling the middle class
Do you need a real estate agent? How home buyers got a leadership position in the housing market
But who cares? For $30K, you’ll own something worth $162K. This is called leverage, and this is what can make you rich. You can raise your 20% to 100%. This means that you get 100% of the value of the property and 100% of the rent it brings in, not 20%.
Do you see how amazing it is? For $30,000, you would own less than 200 shares of Apple. Name a business or other investment where you can put up only 20% and own 100%.
Something to note: Investment property mortgages, also called “owner unoccupied,” are slightly different from a traditional homeowner residential mortgage. Non-owner-occupied loan rates can be higher, down payments may be a bit more, and loan terms tend to be shorter.
In addition to 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 higher your cash flow. If you buy the right piece of property, not only will your rental income cover the mortgage, but the extra cash flow will be your profit.
Likewise, if you buy a property at below-market rents and may need some upgrades, you can do the upgrades and increase the rents thus increasing cash flow as well as equity (because the property will be more valuable after upgrades.)
Going green is good for business: Why it pays to be environmentally conscious
As indicated, your stakes in the property are growing as much as you appreciate. If you look at a graph of real estate prices, it often eventually tends to go up (with some bumps of course 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 cuts
As with any business, expenses related to your real estate business are tax deductible. This will include interest paid on loans, utilities, property insurance, property taxes, upgrades and maintenance, property management fees and supplies. Even better: All upgrades increase the property’s value.
5. Bigger and better characteristics
With a capital increase, you can always qualify to go into larger buildings.
check it out:
Uncle Sam loves when investors upgrade to nicer properties because it helps the economy and creates extra taxes. As such, you need to know something called a 1031 exchange. A 1031 exchange is a government tax incentive program that allows you to sell a piece of property, trade in a larger property, and not pay taxes (aka capital gains) on profits until the end of your investing career when Do it in the end have to pay.
But by then, you may be wealthy enough that you don’t mind too much.
Real Estate Firms: They Don’t Cost, They Pay!