Real estate investing has become increasingly popular over the last fifty years and has become a common investment vehicle. You might hear friends, family or co-workers talking about their investment property and how they are earning monthly income by renting it out and/or are watching their asset grow (in some cases, considerably) while appreciation rates continue to soar. If you haven’t considered real estate as part of your financial portfolio now might be the right time. Here are some reasons to consider investing…
1. Increasing Appreciation and Personal Income
While in some instances mainstream media is already suggesting that we’re on the verge of the next housing bubble and that current appreciation levels are not sustainable, this is far from true. As of June 2015, home prices were up 6.5% year over year on a national level, but in Denver they were much higher – 17.6%. But before we decide that affordability is too expense, let’s factor in personal income. According to a report from the U.S. Bureau of Economic Analysis, personal income in Colorado last year rose 5.6% while across the U.S. the average state income increased by 3.9%. To qualify for a mortgage, personal income doesn’t need to mirror appreciation; rather a ratio of 5:1 is a good benchmark when comparing the two. In the Denver area personal income increases need to be just over 3.5% to continue to afford a home today vs. a year ago, while nationally the income increase would need to be 1.3%.
2. The Millennial Effect
Millennials now represent the largest generation in the United States, comprising roughly one-third of the total population. The first cohort of this generation is reaching their home buying years. The chart below shows the births underlying each generation. The red arrow indicates the number of Millennials born in 1984, who are now approximately 31 years old – which according to the National Association of Realtors is the median time to purchase a home. If you take a look at the way this chart is pointing, you’ll see over the next several years the number of potential first time home buyers (who tend to be the engine of growth in the housing market) will continue to grow. This is not a guarantee of course, as obviously there are a lot of factors to consider when projecting future growth of the housing market. However, if we continue to see the steady appreciation we’ve been seeing, the economy keeps moving along at a reasonable pace and rates stay reasonable there’s a lot of demographic tailwind behind the housing market that leads us to believe that we should see a good amount of health in housing with continued appreciation.
3. Tax Benefits
Another benefit to owning an investment property is the tax deductions an investor receives when owning real estate. When filing returns, the standard document issued by the IRS is Schedule E or the form to report income and expenses arising from the rental of real estate. The advantage of Schedule E is to offset income generated during the tax year with deductions, which in most cases exceed income collected, ultimately showing a loss in revenue and allowing the tax payer to reduce their overall income. In some cases this can reduce the tax payer’s effective tax bracket, lowering what they may owe to both Federal and State agencies and perhaps receive a refund check in April.
The deductions investor’s sometimes overlook can include, but not limited to, property taxes, homeowners insurance, and most importantly depreciation. Depreciation creates a fairly substantial expense which in-turn helps eliminate most gains (income) real estate investments generate. The loss that is calculated from Schedule E reduces the tax payer’s gross income dollar for dollar, lowering their overall tax obligation.
Along with appreciation, several tax advantages come along with owning real estate. To learn more about these benefits, contact your accountant or CPA or if you need a referral, we’ll be happy to offer a couple names.
4. Income Opportunities
Supplementing your income now or in retirement can come from many sources, and real estate income should be a consideration. Along with sustainable appreciation and tax advantages, the ability to generate positive cash flow on a monthly basis could deter having to pull funds from other accounts and allow those accounts to continue to grow and earn interest until a later date. Rental income, is some ways, has a built-in inflation component. Currently, in most major metropolitan areas rents are on the rise and in some cases as high as 10%. While overall inflation hovers around 2%, the extra 8% could be considered net profit.
Real Estate Investing Due Diligence
Although the real estate market has plenty of opportunities for making big gains, real estate investing is a lot more complicated than investing in stocks and bonds. As with anything, there are pros and cons when buying real estate to use as a rental or investment property. Take the necessary steps to plan the purchase carefully and reach out to those professionals who can help answer questions and lead you down the right path. Contact us today for your free consultation to see if real estate investment is for you. We’re happy to review some properties and analyze your situation!