At this time of year we are always encouraged to reflect and focus on the many things we have to be thankful for. This could include things in many areas of our lives, and for me this includes taking a look at several things about real estate investing that I am thankful for. I figured Thanksgiving would be a great time to elucidate a few of those reasons.
1. NO SPECIAL DEGREE REQUIRED
For many of us, we spent years (decades really) going to school or training to be qualified and licensed to practice in our professional careers ….. and with good reason! Thankfully, participating in real estate does not require any special degree, certification, or initials behind your name. That’s not to say that education is not required to have a reasonable chance at success. The beauty of it is that you get to design your own curriculum AND it doesn’t require one to take out a hundred thousand dollars (or more) in loans to learn what you need to learn to get started. It primarily requires that you have an INTEREST in learning and that you take the initiative to self-educate through all relative formats: reading books, following real estate related websites (www.Biggerpockets.com), joining and participating in local real estate associations, attending conferences. No one will require you to pass a test or show them your credentials before you are allowed to participate in real estate investing. Learn the basics, figure out your strategy, get involved, and commit to ongoing self-education!
2. PASSIVE vs. ACTIVE
No matter whether your preference is to be passively or actively involved, there are a variety of ways to get involved in real estate. For those that want to be most actively involved, they could consider owning and managing their own local rentals. Depending on the type of property, the number of units, the distance away from where you live, etc. being an active landlord might be feasible even with a full-time professional job. For someone who wants to own properties individually but not handle day-to-day management, they could target properties (local or out of area) that are managed by a professional property manager and could just be involved in overseeing the manager and participating in larger decisions about the property.
On the passive side, there are plenty of opportunities to co-invest with larger groups (syndications) that pool multiple investors’ money together to buy and run larger properties. In this way you do not have to deal directly with things like tenants or toilets, yet you have the opportunity to leverage the knowledge of experienced, active real estate investors who actively seek out, acquire, and operate the best real estate deals in various markets.
3. TAX EFFICIENCY
There are several tax benefits related to real estate investing that are certainly worth being thankful for. One of the major ones is the opportunity to utilize the depreciation “expense” to decrease taxable income. Oftentimes, despite have positive cash flow the benefit of depreciation creates a paper loss and therefore no taxable income. Even if there is taxable income after depreciation, rental income being passive in nature means it is not subject to self employment tax which would lower the overall tax liability compared to earned income.
Other tax advantages to appreciate about real estate include: mortgage interest deduction, 1031 exchange, and tax-free cash out refinance. A 1031 exchange allows investors to exchange out of a rental property and roll the proceeds into the purchase of another property with deferral of any tax on the gains. It is possible with proper estate planning to indefinitely defer or eliminate any tax in this situation as heirs are able to inherit a property with a step up in basis when the original owner passes away. With a cash out refinance, equity can be extracted from a property tax free as this money is considered a loan and not income so is therefore not taxable money.
4. ONGOING NEED FOR RENTAL AND AFFORDABLE HOUSING
Due to a convergence of many demographic factors, the current and future demand for rental housing is strong. The Millennial generation has been less likely to strive for home ownership and also enjoys the flexible nature of renting and the greater mobility that affords. In addition, many retiring Baby Boomers are frequently choosing to sell their family home and rent out of financial need or a desire to downsize.
Not only are these demographic factors increasing the demand for rentals but the need for affordable housing in particular is an ever increasing sector. Affordable housing means that which is affordable to those whose income is at or below the median household income levels. The downturn of the economy and various markets in and after 2008 irrevocably impacted the retirement savings and plan for many Baby Boomers, leaving many to need a more affordable level of housing in retirement.
This demand creates a great opportunity for property investors looking to help solve the need for clean, safe, and affordable housing.
5. PLENTY OF MARKETS AND SECTORS TO FIND OPPORTUNITIES
Despite the general thinking that good deals are getting harder to come by, there are still opportunities to be had if you are willing to extend your market or sector focus. In other words, increase your funnel size. Although you might have to dig a little deeper than you did a few years ago, plenty of investors are still finding good deals by going to new markets or expanding their criteria to include various things beyond single family homes or apartments to include things like senior care facilities, mobile home parks, or self-storage facilities. Each of these areas has things unique about it that make for a different business model, but these are all things that can be learned through educating yourself and networking with others in the sector.
Hopefully this short list has given you a few reasons to look at the possibilities in real estate in a positive way and be thankful for the many opportunities that do exist.
Wishing you a wonderful Thanksgiving filled with family, friends, food, and gratitude.