Real Estate Financing and Investing/Investing In Real Estate is an I.D.E.A.L. Situation
It has often been said that real estate is the I.D.E.A.L. investment. Each of the five letters in IDEAL stands for an advantage to real estate as an investment.
• "I" stands for interest deduction. In the United States, the mortgage interest paid on the first and second residential homes are tax deductible. On the average, real estate is a good hedge against inflation because property values and the income from properties rise to keep pace with inflation. "I" could mean income. Successful real estate investments usually produce an income stream that typically increases over time.
• "D" stands for depreciation. The building on your land depreciates in book value each year and you can deduct this depreciation from your gross income. This is only true for investment property and not residential. This provides a tax shield.
• "E" is for equity buildup. You build equity through repayments of the principal or remaining balance of the loan(s) taken to purchase the property. This equity buildup is like money in the bank. As you amortize a mortgage, the value of your equity investment will steadily rise. In the case of income producing property, this amortization could mean that your tenants help you build your estate.
• "A" is for appreciation. Your property value goes up every year, hopefully. Appreciation can result from inflation or increases in demand for property or improvement to the property . As the income potential is increases, the price that the property can command in the marketplace rises.
• "L" is for leverage. When you buy a house you make a down payment, say, 10 percent and you borrow the balance, say, 90 percent. You get the benefit of all 100 percent even though you put up only 10 percent of your own money. You can maximize return with other people`s money (OPM). The use of mortgage and OPM means that you can use small amounts of cash to gain control of large investments and earn large returns on the cash invested.
Besides I.D.E.A.L., you could add the following advantages of investing in real estate:
• Tax free refinancing. In the United States, mortgage proceeds even from refinancing are not taxable income to you. Therefore, refinancing is a way to recover your cash investment and, in some cases, you profit tax free.
• Pride of ownership. You may find greater personal satisfaction in owning property than stock certificates.
• Investment and consumption. Certain types of real estate, such as land and vacation homes, can serve both as investments and as sources of pleasure through use.