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Let me begin by saying that real estate as an investment?is the best to make in your entire lifetime.
Depending on how you perceive real estate as an investment, that may raise your eyebrows and cause you to be skeptical or you may agree and slowly nod your head.
Maybe for you, real estate is slow, takes a lot of capital and too risky an investment.
You prefer to keep it safe with time deposits or bonds. Or maybe try out your luck with mutual funds or even stocks.
Go ahead and do that for now but by the end of this post, I?ll show you why real estate is the best investment to make in your entire lifetime.
I?ll show you why time deposits, bonds, mutual funds or stocks don?t come close to real estate?s ability to automatically grow your wealth and give passive income.
In the end, that?s what you really want isn?t it? To be wealthy and not have to work or worry about your finances especially on your retirement.
Don?t get me wrong, I don?t hate time deposits, bonds, mutual funds or stocks. They have their purpose. I have them too.
But for automatic wealth-building and generating passive income,?real estate is the best investment for that. Here are 7 reasons why.
#1. Real Estate Appreciates In Value
The first benefit of real estate as an investment is appreciation. Land appreciates in value over time because of the limited supply of land. Like Oprah Winfrey said, ?They don?t make dirt.?
Land appreciates at roughly the same rate as inflation.
Inflation is the rate that the price of goods increases. It eats the value of your money by lowering the amount of goods it can buy. Your 100 pesos in 2015 will buy considerably less compared to your 100 pesos now.
You know that. Remember the jeepney fare 5 years ago or the price of a Big Mac meal? Your money now can?t buy the same things as 5 years ago. You can?t see inflation but your wallet can feel it.
Because of inflation, cash, time deposits and bonds turn into depreciating assets.
Cash actually loses value over time unless it?s invested.
The same with time deposits (TDs) and bonds. Although, TDs give interest, the interest on a time deposit is always lower than the inflation rate.
With bonds, even if the interest rate is higher than inflation, it?s not rolled over so the principal amount will always remain the same and will have a lower value when the bond matures.
I don?t know about you but I?d rather invest in an appreciating asset.
What all this means is real estate is your best weapon against inflation.
Not only that, real estate is your best weapon for growing your equity. You don?t have to do much for the value of the land to go up.
You don?t wait to buy real estate. You buy real estate then you wait.
#2. Real Estate Is Negotiable
The next remarkable benefit of real estate as an investment is you don?t have to pay the asking price.
That?s right, you can haggle the purchase price of real estate!
If you like haggling in Greenhills and Divisoria, you?ll love this even more.
Most of you don?t think it?s possible to bring down the price of real estate because you only look at properties being sold by real estate developers. Usually, there?s no haggling with developers. When they set a price that?s it. You can get small discounts with their promotions but who wants small discounts?
I would suggest that you only buy properties that is at least 20% below market value. Negotiate the price down to 80% of the market price or even lower.
You can?t do that with cash, time deposits or bonds. No one in their right mind will give you 80 pesos in exchange for 100 pesos.
Same thing with mutual funds or stocks. The value that you put in the beginning is what you get.
But with real estate and a little negotiating skill, you can get free money in the form of equity. If you buy a Php5,000,000 worth of real estate at 20% discount then you have a Php1,000,000 bonus in free equity!
Who wants free money, raise your hands?
#3. Leverage ? Using Other People?s Money To Buy Real Estate
You also don?t need to pay the full negotiated price yourself.
You can make a small downpayment and get financing from a bank, a lender or a partner to pay off the balance. This is called leverage.
You can?t leverage the price of time deposits, bonds, mutual funds or stocks. You have to pay the full price yourself. No bank will lend you money to buy TDs (which is ridiculous), mutual funds or stocks.
This is what gives real estate speed. You may think real estate as an investment is slow because you?re thinking you need to save up to pay off the full price. Not so, you can use leverage to quickly buy properties then turn around to resell them or rent them out.
It gets better because when you rent out property, you don?t have to pay the monthly payments out of your own pocket because you get it from the property?s rental income.
This allows you to get more real estate with the cash that comes in from your job or business.
#4. Real Estate Gives Passive Income
You can get true financial freedom with real estate because it gives passive income. Passive income is income that you don?t have to work for.
You get this by renting out your property. Once a tenant has been secured, all you need to do is encash their rental checks every month.
TDs, bonds and stocks also give passive income. But you have no control over the income you receive from these instruments.
With real estate, you can increase rents every year or every other year. You can also improve the property in many different ways and get even more rental income.
Control is such a nice thing. You can whine about inflation and the rising cost of living if you are a TD, bond or stock investor.
If you?re a real estate investor, you just smile, raise your rents and blame it on inflation when your tenant reacts!
#5. Real Estate Gives Tax Advantages
We all have to pay taxes eventually even for investments. However, real estate as an investment has certain advantages that are not present in other investments.
- You can depreciate the value of the structure on your property and deduct it from your taxable income. This lowers your tax and increases your cashflow.
- In the same manner, you can deduct a portion of the interest payments of your mortgage from your taxable income again to lower your tax and increase your cashflow.
- If you are a VAT entity, you can deduct the VAT that you paid (also called input VAT) from the VAT that you pay to the BIR. Meaning, you make money from VAT and increase your cashflow!
- You can also get chunks of tax-free cash without ever selling your property. You do this by refinancing your mortgage or getting an equity loan. Since this cash is not income, you don?t have to pay taxes on it while you still keep the asset!
Interest income from deposits and some bonds are taxed at 20%. It?s deducted even before you get it. And you can?t do anything about it.
#6. You Control The Real Estate You Own
You control your destiny in real estate.
As you have seen in advantage #4, you can control the income that you get from your rental property.
You don?t have to complain that inflation is eating your interest or dividends. Or that rates are going down ever closer to zero.
In fact, inflation is an excuse to increase your rent, so inflation is not your enemy but your friend!
You do not have to pray that the rural banks which hold your TDs don?t go bankrupt.
You do not have to rely on the stocks that you picked to always go up every year, which is actually improbable.
And you don?t have to worry about scammers like Aman Futures or Multitel running away with your money because you own and control the investment.
Control is a good thing especially for real estate investors, don?t you think?
#7. Real Estate Is Unmatched With Synergy
These 6 advantages taken one at a time already give real estate as an investment a distinct advantage over others.
Taken together, they make real estate the best investment vehicle for any investor.
By combining these advantages, you get an asset that you can easily afford, automatically builds wealth and gives passive income for a very long time.
Take this simple example.
- You found a condo unit being sold for 3.5M while other similar units are being sold for 4M. You negotiate the price down to 3M. You get a 25% discount from market value.
- You make a downpayment of Php500,000 while your bank gives you a loan for Php2.5M payable over 10 years at 8% interest.
- You rent it out for Php30,000 per month. You get a deposit of Php60,000 and post-dated checks of Php30,000 for 1 year. You pay the bank an additional Php300+ per month to cover the monthly amortization.
- Your tenant renews and as a sign of goodwill, you don?t increase the rent. But you get an additional 12 checks of Php30,000.
- On the 3rd year, you increase the rent by Php1,500. The rent now covers the whole monthly amortization and you get Php1,100+ passive income.
- On the 10th year, you?re faced with a dilemma. Should you sell for Php5M (the ongoing market rate) and make 10x your initial investment of Php500,000? or should you continue to collect the rent which is about Php36,000 in monthly rent now that the loan is fully paid? Should you get an equity loan for Php2.5M so you can still keep the asset and just buy a new car? Oh, the choices you have to make.
In this example, we combined appreciation, negotiation, passive income, leverage and control to create an asset that will either multiply your initial investment 10x or give you passive income for a long time.
That?s just 1 property. How many properties like this could you add in 10 or 15 years?
These are the reasons why the rich get real estate as an investment .
These are the reasons why real estate is the best investment you can ever make.
Do you agree now? Let me know what you think in the comments section below.
This is the first post in a series on ?How To Invest In Real Estate.? In the next updates, we?ll explore the different pitfalls, strategies and tactics in real estate investing. To get the whole series, subscribe to Living Cashflow 101.
Source: http://www.livingcashflow101.com/2012/12/benefits-real-estate-investment/
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