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7 REASONS TO INVEST IN REAL ESTATE:
1. Diversification - If having money in the stock market is making you nervous, now may be a good time to consider taking some of the gains enjoyed over the past few years and diversifying into real estate. Recent reductions in liquidity through the FED's QE (quantitative easing) programs has resulted in increased volatility in the stock market. Other factors having an adverse impact on stocks include global events such as conflict between and among nations, economic weakness in European nations resulting in a flight of capital to so-called 'quality,' and the potential threat of global epidemics from diseases such as Ebola.
2. Interest Rates and Liquidity - Interest rates are at historical lows with the 10 year treasury ranging from about 2.0% to 2.5%. LIBOR, which is the benchmark many commercial real estate investments are priced from, is even lower at .25%. Lender appetite for commercial real estate virtually evaporated after the collapse of the Lehman Brothers event sent shock waves through world economies in September 2008. The liquidity well had all but dried up for most types of real estate related investments. Fortunately, the current market environment for income producing assets is very favorable as there is an abundance of capital readily available for real assets such as apartment buildings.
3. Build Wealth Through Asset Appreciation - The opportunity to capture the inflationary component of real returns can be achieved by investing in real estate, and in particular, income producing assets such as apartment buildings. Inflationary measures can, in fact, have a multiplier effect on the value of a multifamily property because of the Net Operating Income (NOI) metric that is used to determine an asset's economic value.
4. Potential to Generate Income through Positive Cash Flow - Another benefit of investing in real estate is the ability to receive monthly or quarterly distributions through positive cash flow that is generated from rental income. After all expenses have been paid, including debt service, the goal is to operate the property in such a manner that the income exceeds the expenses so that the remaining free cash flow can be distributed to shareholders.
5. Reduction of Tax Liability - Current tax laws generally have a favorable impact on a real estate investor's tax liability. For example, an apartment building valued at $1 million has an asset life of 27.5 years resulting in a $36,363 deduction for tax purposes. An investor in the 30% tax bracket would enjoy a very real tax savings of $10,909.
6. Build Wealth through the Reduction of Principal - Most real estate is purchased using a combination of debt and equity giving investors the ability to leverage up. As the principal portion of the debt is repaid each month, the resulting equity necessarily increases by an equal amount. The tenants of an income producing asset, in effect, repay the debt that is owed while the owner enjoys the benefit.
7. Opportunity to Achieve Above Average Returns - Anytime a corporation can add value to the goods and services it produces, the opportunity to capture additional profits exists. This is especially true of real estate where value can be created in a multitude of ways. It is the application of the principle that the sum of the parts is greater than the whole, or 1 + 1 = 3. A simple example is the 'fix and flip' strategy that is applied by countless investors who buy and sell single family houses for a profit after renovating them. Savvy operators of apartment buildings can apply the same principle, albeit on a much larger and much more efficient scale.