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The Cal State Companies:  Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership

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Making Money With

 Residential Income Properties

           

            LOS ANGELES, CA. You have heard time and time again “If I only had purchased that rental property, I would be worth millions today”. 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: These 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.

4.      Cash Flow: Purchased on the “correct” terms income properties can generate cash flow to supplement other income.

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5.      Inflation Hedge: As hedge inflation, residential income properties continue to be one of the best hedges against inflation.

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 real estate investing and has authored books in these fields published by John Wiley & Sons of New York. 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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