Latest / Cash Flow for Life / Chapter 2: Real Estate is a Most ABLE Investment
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- 00;00;00;08 - 00;00;34;15 Chapter two. Real estate is the most able investment. Two few people appreciate the amazing advantages realized by holding real estate as an investment. Investors often complain about their stocks and bonds as they watch values fluctuate and inflation erode the value of their investments. Our goal in this chapter is not just to illustrate the advantages of real estate investment, but to compare it to alternatives like stocks and bonds. 00;00;34;17 - 00;00;58;03 While those investment types are fine for certain financial goals, there are particular disadvantages that come with investing in stocks and bonds. Real estate investment avoids these disadvantages and even capitalizes on the situations that create them. Here are the very able characteristics of real estate investment. 00;00;58;06 - 00;01;29;22 Scalable A huge pie with a slice for you. The real estate pie is so unimaginably large that you need only the tiniest slice to become wealthy. It's scalable so you can increase the size of your slice whenever you want. There are more than 150 million homes just in the United States and Canada alone. So finding the right investment properties for your financial plan will not be a problem. 00;01;29;25 - 00;01;57;06 Most investors begin with a single home, buying it for rental income and the other financial advantages of real estate investment. Once they're enjoying these many advantages, it's a logical next step for them to buy another, then another. Some will move into multifamily and apartment investments to take advantage of the economy of scale enjoyed by owning multiple units in one location. 00;01;57;08 - 00;02;24;24 What type of rental properties you end up owning isn't important, however, as long as they help you meet your investment in lifestyle goals. That's the whole point. How quickly you expand your holdings is entirely up to you. Remember our first landlord experience during college? Scott? There are seven groups, all waiting to see our only rental property. You got to get over here and give me some help showing this. 00;02;24;26 - 00;02;53;05 I'll help Michael, but let's rush them through because we need to go right afterward and buy another one available. Anyone can buy it. Anyone over the legal age to enter into a contract can purchase an own real estate. Whatever your gender, race, social status, religion or income, it doesn't matter. Real estate is there for you without bias in its return on investment in some areas. 00;02;53;11 - 00;03;24;11 Even a minor can own real estate if purchased with a signature of a legal adult guardian. Corporations, nonprofits and institutions all own massive amounts of real estate. It's an investment asset that is available to just about anyone appreciable. It increases in value over time. Historically, real estate has consistently appreciated in value over time. The asset is worth more every year as time passes. 00;03;24;13 - 00;03;51;14 Now, don't expect that with vehicles or other hard assets, because they often depreciate the day they leave the showroom. Stocks. Volatility is a term often used when talking about the stock market, how a public company is run, and mistakes and service delivery or production can cause shares of stocks to lose value by low and sell high is a well-known goal of the stock market investors. 00;03;51;16 - 00;04;23;24 However, it is uncertain whether this strategy will work or just the opposite will happen. Probably more importantly is the stock market is public. There are thousands of transactions that happen in a small period of time. This means the psychology of how people buy and sell is even more important than the real value of the asset. In many cases, bonds bonds are purchased by many investors later in life because they feel they're less risky than stocks. 00;04;23;27 - 00;04;52;23 They are purchased because they provide regular, though low yield interest payments without the risk that stocks spring. They do not appreciate in value, paying out only the initial agreed upon amount. The consistent appreciation of real estate has a lot to do with the fact that there's a limited amount of land, and the cost to build on land has usually increased every year due to general inflation and labor and material costs. 00;04;52;26 - 00;05;17;27 More bonds and stock shares can always be issued, diluting the value of a previous share in some cases. Land, on the other hand, is a finite commodity. They're not making any more of it. Rentable cash flow from people who pay to use it. Remember when the light bulb went on over our heads in that college rental so many years ago? 00;05;17;29 - 00;05;46;14 A whole new world opened up to us. When we realized that our landlord was clearing $500 a month over his costs every month, when we scraped together our rent just to get by by a stock and hold it. And you won't see it paying you regular unless you're in a dividend paying stock. If it is, then the price performance is a trade off because it will not be a stock that gains significant value during your holding period. 00;05;46;17 - 00;06;13;28 Stocks gain when companies plow profits back into growth. When they give profits to shareholders as dividends growth suffers and share value doesn't increase as much over time. Bonds will definitely provide you with cash flow, but you lose any ability for appreciation for the security of a promised interest rate payout. The investor forgoes any increase in value over time. 00;06;14;01 - 00;06;39;16 Real estate is the only asset class that will consistently pay you cash every month, even as it is appreciating in value at the same time. Add this cash flow advantage to the others on our able list, and you'll readily see why the real estate investment is a reliable path to your future financial independence and the lifestyle you desire. 00;06;39;18 - 00;07;09;02 Hedge hedging. Other asset classes. All financial investment advisors tell their clients to diversify. However, most of this advice is in the context of buying different classes of stocks or bonds, or buying stocks in different industries as a hedge against losses in another industry. The idea is that by holding stocks in technology and in durable goods, for example, you may have some protection against losses. 00;07;09;08 - 00;07;30;08 If one industry class is losing value, they also advise that holding some bonds will hedge against stock market fluctuations. You will continue to draw the interest promised by the bond, and can wait out the stock market to see if you can recoup your stock losses in the next potential uptrend. 00;07;30;10 - 00;08;03;29 Those are great strategies if you're trapped into those two asset classes stocks and bonds. However, when you put inflation into the picture and it always is neither class benefits while some industry stocks can benefit from inflation in their product prices, just as often their production costs rise as well. So profits say stagnant and stock values are two. If it's a dividend paying stock or a bond with a fixed interest rate, inflation takes a heavy toll on your real returns. 00;08;04;02 - 00;08;27;25 Real estate can be your hedge against those perils. What happens when labor costs go up? How about when the price of lumber and building materials are rising? Well, it becomes more expensive to build the home and home prices normally move up as well. Your rental properties value goes up with inflationary pressures, making it a perfect investment hedge in a market with rising prices. 00;08;27;27 - 00;08;55;16 But there's another advantage and it's about your rents. Your cash flow will often increase as well. If inflation is driving up home prices, then it's likely there are some upward pressure on rents as well. Fewer people will be buying, which means more renters. More renters means greater demand. And we're back to that college project again. Increased demand brings opportunity for rental property owners. 00;08;55;18 - 00;09;26;02 Leverage a little. Money, controls a lot of asset. OPM, other people's money is the way to leverage your available capital and control a lot more asset with a lot less money out of your pocket. Next to cash, real estate is considered to be the most stable asset to own. This means that banks and other lenders will give you money to purchase real estate, because they see it as a secure investment. 00;09;26;05 - 00;09;50;20 All of the advantages we've talked about in this chapter so far are valued by lenders as well. They see a stable asset that isn't going to be moved, can't be easily destroyed. Insurance offsets the risk of structure damage or destruction. Lenders know that real estate has historically always grown in value. They also have extra security in that they can take the property. 00;09;50;21 - 00;10;21;16 If you do not make the required payments. For all of these reasons and more, you can use less of your cash as a down payment and use the lenders money for the remainder of the purchase price. You can control 100% of the asset value with only as little as sometimes 5%, often 20% of your cash actually invested. Now you're getting that other 80% to even 95% of the rental cash flow, not the lender. 00;10;21;19 - 00;10;48;26 You put down a very small amount of money, but you get the rental cash flow based on the entire asset. That's leverage. Try doing that with your stock portfolio. Improving, you can add value. While many rental property real estate investors by hold rent and then sell properties without making improvements. There is potential to do more. You are in control. 00;10;48;29 - 00;11;14;29 You could decide to make improvements to a property in the right way that will add value to the property in excess of the cost of the improvements. Remodeling, rehabbing, adding square footage to a home will increase its value. Owning a $100,000 home and doing an addition or remodel costing $15,000 will usually add more than the cost to the value of the home instantly. 00;11;15;01 - 00;11;51;28 Now that's just the beginning though, because now the basis for future appreciation is higher as well. So your ultimate return on the investment will be compounded year over year. Then there's that great kicker that we could readily see in our college rental property investments, immediate rent increases and better cash flow. If, for example, adding a bedroom would accommodate another tenant and therefore increase the rent, we would recoup our cost very quickly and realize added ROI into the future. 00;11;52;04 - 00;12;28;06 For as long as we keep that property tax advantage, great tax benefits. One thing that always erodes your investment returns on bank accounts, stocks, bonds and other equities is taxes. In areas with progressive tax rates. The better you do, the more you're taxed as a percentage of profits. So you are penalized for your success. There aren't many ways to minimize taxes on these types of investments, because there aren't really any deductible costs for holding them. 00;12;28;08 - 00;12;52;18 Real estate, on the other hand, enjoys many tax advantaged strategies. Depending on your country, state, province. There are many deductions and tax reduction strategies available. Now, we're not here to give tax or legal advice, so please always check with your tax advisor, your tax accountant to find out what's working for you in your area and with your strategy. 00;12;52;21 - 00;13;28;07 But here are some examples of what you might encounter. Capital gains deductions on principal residence. Deductions of state and local taxes on rental properties. Closing costs, expense deductions on rental properties, rental and management expense deductions, insurance for rental property deductions, marketing and advertising expense deductions. Repair and maintenance expense deductions. And in the United States, you have the 1031 tax deferred exchange. 00;13;28;09 - 00;13;40;03 It's easy to see that there are a number of excellent and legal ways in which to maximize your return on investment in real estate by lowering your tax liability. 00;13;40;06 - 00;14;06;06 Stable. Slow to rise and slow to fall. Now, if you really want stable, bonds do provide a ton of stability. Unfortunately, the trade off is a paltry return on your investment, sometimes not even enough to profit to outpace inflation. That's right. Sometimes bonds don't even go farther than inflation. This is in the path to riches or a better lifestyle. 00;14;06;08 - 00;14;34;20 It is more of an attempt to maintain the status quo, to not lose too much money. And much of the time it doesn't even cheap that goal. Real estate has proven to be one of the most stable investments in existence in history. Of course, there are market cycles in real estate just like any other investment. But over time, the predictability of real estate investment values and returns has been a great draw for savvy investors. 00;14;34;23 - 00;14;57;29 Livable. Everybody needs a home. In 2011, National Geographic stated that the world's population was approaching 7 billion people and that it would be around 9 billion by the year 2045. Now, if you're reading this in the year 2045, let's see what the population actually is. I'd be curious to find out, but either way, all of those people have to eat. 00;14;58;02 - 00;15;27;04 So food is a major necessity. They all need a place to live, so a housing will always be a requirement with increasing demand year over year. Let's think back to those moments in our college days. Supply and demand are the basis of commerce and prosperity. People will always need a place to live. As the population increases, more people bring greater demand for housing and rising prices are the logical result. 00;15;27;06 - 00;16;01;00 Once you're out there building your real estate rental property inventory, you'll be comforted by the reality of statistics like these owning an asset that is destined to experiencing increased demand for into the future. In my opinion, is much better than holding any stock or bond with an uncertain future. Learnable. Anyone can learn how to do this. The higher mathematics required for rocket science make it a calling beyond the abilities of much of the population. 00;16;01;02 - 00;16;29;14 Real estate, however, isn't rocket science, and the things that need to be learned to be a successful real estate investor are easily learned by anyone who wants to invest successfully. First, real estate is all around us. It's commonplace. You need only to walk around to see real estate in every direction and of every type. Learning about real estate is much easier when examples are virtually everywhere we look. 00;16;29;16 - 00;16;54;03 We can walk into buildings, learn about construction, and see what people need and want in places where they work and live. Whether we're sleeping, walking the dog, working or shopping, or doing it in real estate. Everything we need to help us learn about real estate is right in front of us, every single day, in all of our activities. 00;16;54;06 - 00;17;24;03 If we want to know what current tenants are demanding in the way of rental home amenities, we can invite ourselves to take a look. We can call up rental management companies and ask them to show us the properties they manage that command the highest rents, and they'll take us right in for a look in some education. The math required for real estate investment success is far from rocket science stuff, and there are even many software programs available that will do it for us, with new ones popping up every day. 00;17;24;06 - 00;17;53;25 If you can read and listen, we can help you become a successful real estate investor living the lifestyle you've dreamed about. Peaceable. Sleep well with real estate. Take a moment and skim back over the previous 11 able characteristics of real estate investments. How do they make you feel about real estate investment from a risk perspective? When we asked our live event and course attendees this question, they don't have to think about it. 00;17;53;29 - 00;18;22;11 They always say that the characteristics make them feel comfortable with real estate as part of their financial independence, and in a low risk but high reward business. You'll experience peaceful sleep, unlike millions of people who go to bed wondering where their stock market portfolio will open up in the morning because there was bad news a day before the clothes, or there was conflict in some part of the world, or or some leader did a tweet and the stock market completely changed. 00;18;22;13 - 00;18;51;12 Your investments are always where you can see them and monitor their condition with real estate. Action steps. Take a piece of paper and write down each of the 12 able characteristics you've learned in this chapter. Leave some room between each for a couple of notes. Now we're going to rank them on a scale from 1 to 10, with ten being very important to you and a major factor in your decision to invest in real estate. 00;18;51;15 - 00;19;17;18 Rate. Each factor is importance to you, your investment, and your personal lifestyle goals. Also, if something comes to mind about why a particular item appeals to you. Write that down. Sometimes our past experiences, particular with other investment types, will cause us to highly value some of these characteristics over another. This is how you can customize your most able plan. 00;19;17;21 - 00;19;42;26 Perhaps you've been in the stock market during one of the periodic crashes and lost a major portion of your net worth. Or maybe you've tried bonds and found that inflation took most or all of your profits, leaving you with less than basic bank interest as a return on your investment. It doesn't matter because you're comparing the many benefits and strengths of real estate investment with these other investment activities. 00;19;42;28 - 00;20;02;10 What's next? Now we've done a general assessment of your investment knowledge and financial capabilities. However, now that you have a better picture of the advantages of real estate investment, we'll go through a more detailed assessment of your abilities and the resources you are willing to commit to your real estate investment business.