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Is Real Estate Worth the
Investment?
LOS
ANGELES, CA. Years ago, I discovered that real estate was the best investment
to control risk and create wealth. The Real Estate Digest reports that seven
out of ten millionaires made their money in real estate, and Forbes magazine states
that there is a three times greater chance of becoming wealthy through real
estate than with any other type of investment.
Using Real Estate Investing
to Control Risk
Real estate
allows you to control your risk because you can actively participate in the
decision-making process. Passive investments such as stocks don’t give you this
opportunity. Movements in real estate values are less erratic than in the stock
market. Most people don’t understand the economic forces influencing the
market. Since real estate is less volatile, it’s easier to control and to
understand. Real estate is tangible. You
can touch it, you’ve been exposed to it all your life, and you can identify
with it. As a result of this familiarity, you are better able to understand it.
Effectively Reducing Your
Taxes
Real estate
ownership continues to be the most popular form of investment because of its
potential for substantial tax savings. Since you are able to actively
participate in the management of real estate, the Internal Revenue Service
(IRS) currently allows qualifying individuals to write off up to $25,000 per
year against salary and other income. No other investment gives you this
capability. In addition, you can defer paying income taxes on profits indefinitely
by using tax-deferred exchanges.
Leveraging That Works
Real estate is the only major investment that gives you the
ability to acquire ownership with very little money down. This degree of
leveraging allows you to amplify profits by using other people’s money. The more
assets you are able to control, the more opportunities you have to succeed. The degree of leverage is calculated by
dividing the total purchase price of the property by the amount of funds used
to purchase it. Thus, if a down payment of $10,000 plus a $90,000 loan is used
to purchase a property, a 10 to 1 leverage ratio has been achieved. The greater the leverage, the more equity
will increase with the change in value of the property.
Residential Income Properties
In the past
20 years, residential income properties have delivered the highest average
total investment returns of all real estate types. With a built-in hedge
against inflation, it’s no wonder that residential real estate has
out-performed all other types of real estate investments with relatively low
risk. Based on supply and demand over the next 10 years, residential income
will out pace all other types of real estate investment. Strong demographic and
financial indicators along with changing lifestyles should continue to
positively influence residential income investments.
Residential Real Estate
Investing’s Three Advantages
1.
They are less dependent on business cycles for
occupancy than any other type of real estate investments. It
doesn’t matter if interest rates and home prices are high or low, residential
real estate investments are generally more affordable.
2.
They have
shorter leases; thereby offering greater protection from inflation than
the long-term leases associated with commercial
properties. Rents can be negotiated more frequently.
3.
The pool of tenants is much greater for them
than other types of properties. This ensures a more
consistent occupancy than industrial or commercial properties, which usually
have only a few tenants to choose from.
Real Estate Investments as a
Shock Absorber
Real estate
generally outperforms equities because of its higher yields, greater price
stability, and downside protection even in a recession. When stock markets are
down, real estate investments hold value and produce a positive return. Real
estate is less prone to booms and busts. Residential income real estate is now
stronger than it has been in many years.
ABOUT THE AUTHOR:
Eugene E. Vollucci, is considered to be one of the foremost
authorities on real estate taxation and rental income investing and has
authored four books in these fields. He is the Director of the Center for Real
Estate Studies, a real estate research organization. To learn more about the
Center for Real Estate Studies, please visit our web site at http://www.calstatecompanies.com
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