Do you have enough for retirement? Financial planners typically use the “25 times rule” to determine how much a portfolio should be worth for someone to safely retire. If you need $50,000 a year to live on when you retire, using the “25-time rule” you should have $1,250,000 in stocks, bonds, and mutual funds by the time you retire.
At retirement, financial planners then begin liquidating those assets using a “4 percent rule,” which simply means they liquidate 4 percent of the portfolio each year until it’s down to zero after 25 years. If you retire at 65, you better hope you don’t live past 90 or you’ll be broke.
Compared to investors who rely on the stock market to build wealth for their retirement, real estate investing takes a different approach. If you amass $2,800,000 of income-generating real estate, you’ll be paying in $50,000 a year and continuing to appreciate in value over the years, not only providing you with security indefinitely, but also leaving you with something that you can pass on to your children.
Here’s the interesting part, it only takes $700,000 in investment capital to accumulate $2,800,000 in real estate wealth. For comparison, earning $50,000 a year in income requires about $900,000 in stock investments, assuming both types of investments have a 4 percent return over 30 years.
Real estate has many advantages over investing in stocks, bonds or mutual funds. Real estate offers predictable cash flow; it appreciates in value to keep up with inflation; It offers higher returns due to positive leverage and offers equity growth through debt reduction. In retirement, real estate is a self-sustaining asset, while stocks are a self-liquidating asset. Which would you prefer, a self-sustaining fortune or a self-liquidating fortune?
Ten reasons to invest in real estate:
Real estate has a predictable cash flow
Cash flow is the net income from the investment after all operating expenses and mortgage payments have been made. A good real estate investment should give you a cash flow of 6% or more.
Real estate increases in value
Since 1968, real estate has increased in value at 6 percent per year, according to the National Association of Realtors, even during the economic downturn that began in 2007.
Real estate can be leveraged
The most important benefit of real estate investing is leverage! It is the use of leverage to increase the potential return on an investment. In real estate transactions, leverage occurs when a mortgage is used to reduce the investor’s capital required to purchase a property. The annual return on a $200,000 property with $20,000 net cash flow purchased with cash is 10 percent.
Reasons Real Estate is a Superior Investment
Now let’s say a $150,000 loan is amortized over 30 years at 5 percent interest, but 75% of the money needed to buy the property is borrowed, even allowing for the cost of paying the mortgage, is the annual rate of return more than double that to 22 percent.
Once you have established an equity position in an investment property, you can leverage that investment for cash in two ways: secure a second loan against the increased equity, or refinance the original loan amount plus the increased equity. This frees up money to buy another investment property.
Real estate offers equity accumulation
Most properties are bought with a small down payment, with the balance being provided through debt financing from a lender. Over time, the principal on the mortgage will be repaid, slowly at first and then faster towards the end of the payback period. This capital reduction builds equity.
Real estate is expandable
One of the most unique and attractive advantages of real estate is that it can be improved. Since real estate is a tangible asset made of wood, brick, concrete, and glass, you can improve the value of any property with a little “Elbow Grease” and “Sweat Capital.” Whether it’s structural or cosmetic repairs, whether you do it yourself or hire someone, the principle is the same. You can make your property worth more by upgrading it.
Real estate coincides with retirement
When buying real estate, the cash flow is less and the principal reduction of the mortgage is less. Over time, the mortgage is paid off or paid off and the cash flow increases. In some ways, it’s a forced savings program that pays off a larger amount over time, making it a perfect investment for retirement as it increases cash flow later.
Real estate is tax deductible
Tax laws allow various deductions for the normal expenses of owning real estate, such as: B. Upkeep, maintenance, improvements and even the interest paid on the mortgage. The deductions can offset income and reduce your overall taxes.
Real estate is depreciable
Depreciation is a non-cash expense permitted by a tax law that depreciates the value of your investment property over time. However, the value of your investment property has actually increased. The depreciation allowance allows a real estate investor to generate greater positive cash flow while reporting lower income for tax purposes. This results in a higher return than you might initially assume.
Real estate has a lower tax rate
If your investment property is sold after a year, the gain will be subject to the capital gains tax rate, which depending on your individual tax bracket is typically 15% or 20%, which is typically lower than your personal tax bracket.
Real estate gains are deferrable
Our tax law permits, under a 1031 exchange, the gain on the sale of an investment property to be transferred from the property for sale to a new property for purchase, thereby deferring the payment of any taxes on the sale of the property.
There is one final advantage of investing in real estate and it is understandable and simple for almost everyone. It is easy to acquire, easy to finance and there are no insurmountable financial barriers to entry. It’s easy for most investors to improve their properties and it’s easy to take advantage of the tax benefits. As Wall Street becomes more of a mystery and a financier’s game, real estate investing just keeps getting better for the average American.
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