A lot of mediation cases result from disputes between landlords who want to maximise their bottom dollar and spend as little as possible, and tenants who feel they are being pushed to do the landlord’s job of upkeeping properties because the landlords are not responsive enough. What makes someone want to invest in property in the first place if they are not prepared to invest time and money into maintaining it?
Cash Flow: Whether you buy with all cash or use today’s favorable financing with a low mortgage payment, positive monthly cash flow occurs when the monthly rent is greater than the monthly expense. This gives you a monthly income from your property investment.
Appreciation: Appreciation is the increase in the property’s value, which generally occurs over time and can also be increased by an investor who adds value to the property through repairs and/or enhancements. This is a great way to create equity in the property.
Depreciation: Even with an increase in the property’s value, the government allows owners a tax deduction on their property over its life span. This annual deduction is called depreciation which you can start taking when you have owned the property for at least one year. By taking advantage of depreciation, the cash flow you receive is protected so that you receive some or all of it tax free. If you are an investor with an income from another source such as a regular job, it can also protect all or some of that income from state and/or federal income taxes. Talk to an accountant to completely understand the full benefits of depreciation.
Tax Benefits: In addition to depreciation, an investor can usually claim the interest portion of his monthly mortgage payment as a tax deduction.
Leverage: Leverage is a very powerful reason for investing in property. If an investor uses 100% cash to acquire a house worth $100,000, and the house increases in value by $5,000 in one year, then the investor makes a return of 5% (assuming no other costs in this case). However, if the investor obtains 80% financing, only $20,000 cash would be required at the closing table, and a bank or other lender would loan the remaining $80,000 to acquire the property. Assuming the same $5,000 increase in value, the investor’s cash contribution of $20,000 would yield a 25% return on investment ($5,000 increase in value divided by the $20,000 investment) in the same one year period of time.
Using the above example, if the investor is able to net even a conservative cash flow of $200 per month, this will result in an additional $2,400 per year added to the increased appreciation. The return for the year would now be $7,400 ($5,000 appreciation plus $2,400 cash flow) and the return on investment would now be 37% ($7,400 divided by $20,000). Even if the property value remained stable with no appreciation, there would still be a positive return of the $2,400 in cash flow with a return on investment of 12%.
Considering these benefits in addition to the low interest rates for financing, you can see how easy it is to accumulate wealth and become a successful investor.
Other Reasons Why People Invest in property
Now let’s look at other reasons why people invest in property. First, let me ask you a very simple, yet provocative question: Why would you invest in property? Understanding the answer or answers to this question will help you along your investment career. Following are the most common answers I have heard during the course of my property career:
Freedom: Frankly, this is why most people start investing in property. They get star struck with the idea of riches that would give them the freedom to stop working for someone else. They may have a great job that they absolutely love that pays the bills, but they still want to achieve long-term freedom. They can see that by buying and holding cash flow properties over time (and sacrificing and delaying gratification), in five, ten or twenty years, they can have a pile of monthly cash flow and have gained the freedom they desire.
Control: Some investors I speak with want property in order to gain some degree of control over their financial lives because, let’s face it; we have zero control in financial investments outside of property investing. If you invest in the stock market or money market funds, you have no control over the return you will make. With property, there are things that you can do to control your return on investment as shown above.
Alternatives: Some investors will admit that property is nothing more than a portion of their overall investment portfolio. Perhaps they have divided their portfolio to include mutual funds, stocks, property, etc. Or they may be looking to achieve higher returns from their cash through active management.
Job Escape: A few investors look at property investing as a career, or a chance to own their own company. Others may look at property as a means to eventually replace the job or career they currently hate. Creating Value or Thrill of the Hunt: Many investors love the thrill of the hunt, chasing down a deal or cashing in on their last remodel. They pursue that addictive feeling and are always looking for the next rush or opportunity to turn an ugly duckling into a beautiful swan.
Options: After many years of property investing, I have come to realize that in the end people love investing in property because it has given them so many more options. They have the options to keep working their current job, to buy property as a full time career, to have the time and money to travel, etc. The more they invest, the more option doors are opened.
The Real Reason to Invest in property
People fall hard for the sexy pitch of earning freedom. Frankly, freedom is good but I think what people really want is options. That is why they keep working so hard to find the next deal, to find the next investor, and to keep building their growing portfolio. Some might think freedom and options are the same things. But freedom is more sustained while options are more temporary. But to me, freedom means that a person can stop doing something while options mean a person can do other things. I can tell you firsthand that having options is better than having freedom. I would say you get freedom first and then you build or acquire options.