Education and Real Estate Investments
Many people have thought about the advantages of investing in real estate. Even though the world economy is presently on shaky ground, this may be an excellent time to invest. Negative externalities, such as a global pandemic typically cause market dislocations that can create attractive investment opportunities in distressed real estate assets.
While real estate is an excellent way to supplement and diversify your income, it does carry a rather steep learning curve. Real estate investors must be able to understand the legal and financial requirements of buying, selling and operating a real estate asset. It can take time to source, underwrite, structure and finance a real estate investment, and some initial experiences and early decisions can quickly turn into expensive mistakes. Watching out for these potential pitfalls is a good reason to engage with a real estate professional who can help you avoid or work through these early problems.
In this article, Jonathan Weiss will explain five reasons why real estate investing is appealing and how the average investor can grow their personal wealth while making a solid investment for their future. He also describes the various ways in which prospective investors can learn about the field, including classes and webinars.
Ways to Receive Real Estate Education
Many business schools and top-tier universities offer real estate investment courses online. MIT has an online knowledge base that is free to all.
Udemy and Skillshare offer paid video courses at an affordable price. Topics are varied and include short-term rentals, house flipping, and mortgages.
Another free way to get an education in real estate is to listen to industry podcasts. BiggerPockets and Rental Rookie offer a broad variety of topics including real estate market analysis. Podcasts cover topics appropriate for beginners to established real estate professionals.
Many real estate publications and news sites offer free webinars. These webinars cover many topics and focus on getting you up to speed with real estate concepts. The BiggerPockets webinar and National Association of Realtors webinars are particularly helpful.
Reasons to Invest in Real Estate
1. Steady Cash Flow
Real estate investment is a great way to make money both in the short and long term. In the short term, real estate properties can provide a significant amount of current income through in-place leases, as soon as the asset is acquired.
Jonny Weiss recommends starting with a small rental property at the beginning of your real estate career. While you may have to put in money to renovate your rental property, the renovation costs will be accretive for long-term investment performance since you should be able to charge significantly higher rents.
Real estate can also provide a lucrative return in the long term through land appreciation and terminal value when the property is sold. Long-term leases structured with built-in rent escalations, provide owners of commercial real estate stabilized cash flow that is easier to predict than the stock market where equities are more speculatively valued on future earnings.
Jonny Weiss reminds readers that real estate is an excellent way to build passive, diversified income and long-term equity in properties that can be valuable for retirement savings or generational wealth planning. You will also be able to pass along certain expenses to your tenants, like property taxes and utilities, which help manage costs and increase annual net operating income.
You don’t have to manage your own property. You could contract it out to a property management company for a hassle-free experience, but this in itself can be expensive.
2. Relatively Low Volatility
According to Jonathan Weiss, real estate is typically less volatile than buying other kinds of investments like stocks. While stocks can gain up to 10 percent each year in value, there is no guarantee that you will receive a positive return and you may even take a loss over the long term.
Of course, there are situations where real estate can be risky, especially in speculative or high-leverage situations. House flipping can also be a high-risk, high-reward proposition but prospective flippers should know that it takes a combination of luck and skill to make money in this way, since market timing and construction schedules play a big factor in a successful flip. It is a good idea to balance your real estate portfolio between risky and stable investment types. Historically, direct investments in real estate have shown less volatility than stocks and publicly traded REITS, since they are generally less impacted by short-term news, events, and market fluctuations.
3. Affordable Investments
Real estate can be an inexpensive investment. In the past, direct participation in commercial real estate was reserved mainly for big development firms and institutional investors however since 2012, average individual investors now have numerous ways to make investments in the real estate market.
If you don’t have enough money to invest in a single property, you can invest in a real estate investment trust or REIT. This enables you to break down real estate investment into manageable amounts by purchasing REIT shares on the stock market.
Real estate crowdfunding is another inexpensive way to own real estate, with investment minimums as low as a few thousand dollars. The crowdfunding concept allows you to hand-pick individual real estate projects that align with your financial goals and risk appetite, without making a substantial commitment of personal capital.
When you are a real estate investor, you will not be beholden to anyone. You can be your own boss and know that everything depends on you. Not everyone is cut out for this line of work, and you should look carefully at your own motivations and qualifications before you make the leap into this type of investment.
Real estate investment can also make you more independent when it is time to retire. Your real estate investment should continue to make positive cash flow well into the future if you manage it properly.
5. Tax Benefits
Real estate ownership continues to be a valuable strategy for protecting and growing one’s wealth and provides some extremely favorable tax benefits for investors.
One of the biggest real estate tax incentives is in the form of deductions. These are tax write-offs, which are generally geared towards rental properties, that include costs associated with property taxes, operating expenses & repairs, and mortgage interest.
Depreciation expense is another tax benefit of real estate investing. This allows investors to recover the cost of property and improvements through yearly tax deductions based on a useful life recovery period equal to 27.5 years for residential property and 39 years for commercial property. As of 2018, the new tax law now allows for a 20% deduction of income received through pass-through entities such as LLC’s.
Opportunity Zone funds were introduced as part of the 2018 Tax Cuts and Job Act to promote growth and development in roughly 8,760 underserved and distressed areas around the country. Investors contribute capital gains from a previous investment into an opportunity zone fund that is making real estate investments in a qualified opportunities zone location. Participating in an opportunity zone fund will keep your money tied up for between 7-10 years, however, this allows investors to defer or pay no capital gains tax on their original investment.
The 1031 exchange (“like-kind exchange) is a strategy that allows taxpayers holding real property to potentially defer capital gains taxes when they sell an investment property and reinvest the proceeds from the sale into a like-kind property that is of equal or greater value within a certain time frame.
Understanding the Advantages
Real estate has been a great way to invest and grow personal wealth for several decades. Recently, real estate investing has become more available to average investors looking to capitalize on the distinct benefits provided by commercial real estate ownership. However, to fully capture the advantages and incentives of real estate investing, it is vital to understand the potential associated risks and be prepared to mitigate them. Sometimes the experience and learning from mistakes is all you need to manage your problems, but sometimes you will need to consult a professional, take classes or check out online webinars. Above all, be curious, be open to new ideas, and don't fear making deals.
Real estate professionals like Jonathan Weiss are showing the way toward a profitable and stable lifestyle.
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