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Four Benefits of Real Estate Investing

Real estate is an excellent tool to build and accumulate wealth. There are four benefits to real estate that can make it more appealing than other investment opportunities.

Maximizing as many of these benefits as possible will help you on your way to retirement freedom.

Cash Flow Before Taxes

When you own a rental property the goal is for the rent on that property to pay all of the property expenses so that nothing comes out of your pocket. Any income from rents above expenses is cash flow.

Yes, owning real estate does have expenses. If the property is financed, you will owe the lender payments of principal and interest. Uncle Sam wants his cut and demands property taxes. The property will need insurance, it may need repairs over time, and property management. Other possible expenses include utilities, landscaping, accounting, and  legal fees.

Principal Reduction

If your rental property is financed with a traditional mortgage that combines payments of principal and interest, each payment will increase your equity in the property. This is probably best illustrated by the formula below.

Property Value – Loan Principal = Owner’s Equity

All things remaining equal, as the loan’s principal balance is reduced your equity in the property increases.

The benefit is realized when it is time to execute a sale according to your retirement strategy.The sale will realize a higher proceeds for you to roll into your next investment.

Depreciation

The IRS defines depreciation as:

Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.

The IRS allows you to deduct wear and tear of your rental property.

This is what might be called a “phantom” expense. The IRS allows you to deduct it from income taxes, although you may never have to actually pay for anything with cash.

This deduction can be used to offset other income. (Disclaimer: You should contact a tax attorney, CPA, or  tax professional to see how this deduction would affect your personal situation.)

Appreciation

The final benefit of real estate is appreciation. Appreciation is the increase in value of a property.

All investments have a risk that they may go down in value. Real estate is no different. The current market proves that.

Jokingly some have said that, “God isn’t making any more dirt.” While it may not be entirely accurate, the prinicple is true.

There is a limited supply of real estate in the world, nation, state, county, city, and school district where you live. Scarcity tends to drive prices higher. Real estate has historically risen in value as a longer term investment.

An Appealing Investment

Investing in real estate has four benefits of cash flow before taxes, principal reduction, depreciation, and appreciation that set it apart from other investment vehicles.

If you are tired of being subject to the whims of the stock market, real estate investing may be for you. Real estate offers you a measure of control over your investments and the outcome of the results.

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Retirement Freedom Defined

Freedom is something that most of us strive for in many areas of our life.

Merriam-Webster defines “freedom” as:

the quality or state of being free: as a: the absence of necessity, coercion, or constraint in choice or action b: liberation from slavery or restraint or from the power of another : independence c: the quality or state of being exempt or released usually from something onerous <freedom from care> d: ease, facility <spoke the language with freedom> e: the quality of being frank, open, or outspoken <answered with freedom> f: improper familiarity g: boldness of conception or execution h: unrestricted use <gave him the freedom of their home>

As the definition states freedom is the ability to do what you want, when you want to.

Now of course there are wise limits on the nature of freedom. I am not “free” to take another person’s property or life. That would be a violation of their freedom to use their own property.

Retirement Freedom

The American Dream entails the dream of “Retirement”. That time in your life when the necessity of a 9-5 job is gone. You are free of the tyranny of a boss, commute, and cubicle.

A good definition of Retirement Freedom is having the ability to invest your time, efforts, finances, and energy into the activities you choose.

This freedom varies from one person to the next. It could be vacations with your grandkids, that cruise to Europe, a home in the mountains, time to serve at your church, or the time to work in your garden.

This freedom is made possible due to the accumulation of wealth you have made during your working years. Your wealth is now working for YOU!

The years of saving and investing have finally paid off, allowing you to live off of the income your investments provide.

The Math of Retirement Freedom

How much do you need to live the retirement you have hoped for?

If you don’t have the luxury of a corporate pension plan, you will need to live off of your investment income alone.

Assume that your investments provide a conservative 5% return per year (for every $100 invested you get $5 of income per year), you will need about 20 times your expected income to live without putting your retirement at risk.

In order to maintain the same lifestyle you currently have, you will need almost 20 times your current income. Multiply your current income by 20.

Here’s some numbers:

  • If you make $50,000/year you will need approximately $1,000,000 of savings at retirement.
  • If you make $75,000/year you will need approximately $1,500,000 of savings at retirement.
  • If you make $100,000/year you will need approximately $2,000,000 of savings at retirement.
  • If you make $200,000/year you will need approximately $4,000,000 of savings at retirement.

This is just to maintain your current lifestyle. That does not include your trip to the Bahamas, the tour of the Holy Land, or the lake house you wanted.

What did you come up with? How many dollars will it take for you to retire?

The Path to Retirement Freedom

But how will you get that place of wealth?

There’s always the stock market. How is your 401k doing these days? Seems like this route is entirely outside of your control. You have no way to control whether the market goes up one day or down another.

You could rely on the government. How well will Social Security benefits allow you to live out your final days with family and friends? Does that allow you to live out your dreams?

The lottery is a possibility, but not very likely.

You have heard about real estate investing, but don’t know where to begin. Your friend owns some rental homes. The ability to control your own investments is appealing.

If this is the case, give Maclennan Investment Group a call at (925) 324-8626. Let us show you another path to retirement freedom.

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A Walk in Walnut Creek

This morning I walked downtown to Starbucks for coffee. The cool morning air and the quiet allowed me to think and observe as I walked through the center of the city of Walnut Creek.

When you walk by yourself before the hustle and bustle of the day it is amazing what you notice.

Comings …

Walking past the new Cheesecake Factory I realized what a good decision was made by the city leadership to bring Cheesecake Factory to Walnut Creek. As I idled past the outdoor seating, men were spraying down the patio. The chairs were stacked on the tables. The ground was dark with the water on the stone patio.

The fountains in front of the Cheesecake Factory were babbling as water cascaded down their sides. The flame at the top danced in the wind.

It reminded me of Disneyland before the crowds arrive. Things are still fresh. The cafes are clean before the lunch crowds. It is as if you are walking into an alternate reality where messes aren’t made and people always get along.

I also noticed that the old Bombay store had a sign announcing that it had been leased. That must make the propertyowners very happy.

Of course, Neiman Marcus is still in process of coming to the old David M. Bryan location.

and Goings

The Chocolate Cafe is now closed. It must be hard to compete with a national coffee chain and a national dessert restaurant a block away even though you are 30 yards from the theater’ entrance.

Johnny Rockets’ old store is still closed on Mt. Diablo Boulevard. The tables and chairs are still inside but the sign out front has been removed.

A banner hanging from the Longs’ Drug store welcomed Elephant Pharmacy customers. The Elephant Pharmacy filed bankruptcy a few months ago, and has likely vacated their store.

Character of a City

While the shops and retailers in downtown Walnut Creek may change with time, the character of Walnut Creek does not have to change.

The character of a city is shaped by the character of the people that choose to live in a city, more than the character of the retailers in that city.

As long as honest, hard working, family loving, school supporting, community focused people continue to call Walnut Creek “home”, we won’t have to worry about Walnut Creek changing from the place we have come to love.

I think I will continue my Saturday morning walks, if only to get a better sense of the city I call “Home”.

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Bay Area Real Estate News

Here are a couple of items from today’s Contra Costa Times.

First, in Circuits to seafood: New tenants plug into empty buildings the Contra Costa Times shares about the new uses for former Circuit City stores.

A Seafood City Asian market is due to a open in a shuttered Circuit City store in Concord, and another retailer is eyeing a closed Circuit City in Fremont, raising hopes that at least a few empty retail buildings in the East Bay could gain a fresh lease on life.

Second, in Bay Area rents decline, fueled by unemployment we learn:

Housing prices aren’t the only thing that’s falling in the Bay Area. So are apartment rents, but not nearly as much as the hard-hit housing market.

Still, the average asking rent in the nine-county Bay Area during the first quarter for apartment buildings with 50 or more units was $1,556, or a 1.4 percent drop from a year ago, said a report released Thursday by Novato-based RealFacts.

The occupancy rate fell 1.7 percent to 94.2 percent. The average rent applies to all rental units, ranging from studios to three-bedroom townhouses.

The loss of jobs – or the fear of losing jobs – is leading to lower occupancy rates that push down rents.

Deciphering the News

It is encouraging to know that some retailers are willing to expand in the current market. Seafood City is a supermarket for the Asian/Filipino communities.

As rents decline and vacancy increases multifamily values will decline as investors underwrite at lower income values.

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The Value of Strict Buying Criteria

For most small or beginning real estate investors, the purchase of a rental home is the only option. Investors that don’t have hundreds of thousands of dollars to invest, are likely going to start with a rental property or two until their capital accumulates to buy something larger.

Many new investors look to buy a foreclosed home based on the recommendation of many real estate gurus. Without knowing what they are getting into it is easy to overpay for a property and not reap the full rewards of being a property owner.

The likelihood of overpaying is even greater. The WSJ.com is reporting that Bidding Wars Are Emerging on Foreclosures in certain areas of the country, including California.

Falling home prices are starting to ignite bidding wars in a few parts of the U.S. as first-time buyers compete with investors for the same foreclosed properties.

In most of the nation, the supply of unsold homes continues to swamp demand. Home prices in many markets continue to fall, and foreclosures, which slowed in late 2008 as mortgage companies delayed taking action against delinquent borrowers, are picking up again.

But real-estate brokers say multiple offers on certain homes have recently become more common in parts of California and Arizona and the Washington, D.C., and Minneapolis-St. Paul metropolitan areas.

Strict Buying Criteria

It is important to establish buying criteria in advance of the purchase to meet your investment goals.

The easiest way to hit nothing, is to aim at it.

Buying criteria serve as the the yellow and white stripe along the road. As long as the yellow line is on the left and the white is on your right, you are going the right direction.

The same is true with buying guidlines for real estate investors. First, you need to know which way you are going. Second, you need the guidelines in place to keep you on track.

Setting price, income, and expense goals in advance will protect the early investor from venturing to far from their goals and jeopardizing their retirement plans.

If you would like help establishing your buying criteria, feel free to call Maclennan Investment Group at (925) 324-8626.

Company Profile

Welcome to Maclennan Investment Group, Inc., your East Bay Area real estate investment advisors. Maclennan Investment Group assists buyers and sellers of real estate maximize the investment potential of their real estate assets. Learn More about us.

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925.385.8798

Maclennan Investment Group, Inc.
3380 Vincent Rd, Ste HUB
Pleasant Hill, CA 94523
p. (925) 385-8798
Licensed Broker in the State of California, DRE#01871809
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