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Looking Forward to 2013 and 2014: Five Reasons Why Real Estate Investing Should Be a No-Brainer

Looking Forward to 2013 and 2014: Five Reasons Why Real Estate Investing Should Be a No-Brainer

By on Mar 21, 2013 in Personal Investing | 0 comments

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Article By, Movoto Real Estate

The housing market has only recently started to turn around, but its chaotic collapse in the late 2000s prompted many investors to turn to the stock market. Stocks bounced back more quickly, making the high-tension workplace appear as the better option to supplement one’s income.

It’s true that you can make high profits from stocks–but often at the price of high stress and high risks. If you look back at the cycle of the stock market, you’ll find that every four to six years it experiences a large rut. Well-known experts in the field are predicting that 2013 will be such a year, and you won’t want to get caught with a soggy stock when the storm comes.

It’s time we break down the barrier of “stock investments are the way to go.” Here are five reasons why you should re-think your next stock purchase and buy real estate in the coming year instead.

1. It Means a Long-Term Cash Flow
As soon as your investment is ready for lessees, you can begin to collect cash flow. This is a fancy word that refers to the profit you make after covering any property expenses (such as the mortgage and upkeep).

Real estate investing in 2013 should allow you to turn around a fairly quick profit, considering the positive trends in many major metro real estate markets. While stocks will require you to wait (and wait, and wait) to secure profitability, your real estate investment should start funneling desirable cash into your pocket as soon as you’ve finished sprucing up your rental.

Based on the trends of the past 30-plus years, real estate prices have steadily increased, even considering ruts in the market. This will undoubtedly continue to be the case.

  • In 1980, the median price of a home was $62,200–an 11.9 percent increase from the year before.
  • As of May 2012, the median home sale price was at $146,000, meaning it more than doubled since 1980.
  • What’s more, the population of the United States will continue to grow, meaning the demand for housing will continue to drive prices up (and make you a very happy investor).
  • Plus, we’re now seeing signs that the real estate market is coming back. Home Depot(NYSE: HD) and Lowe’s (NYSE: LOW) both beat their earnings reports.

2. Inflation Will Positively Affect You
Considering typical economic trends, its virtually certain home prices will be positively affected by inflation in 2013. As commodities increase in value, so does the price of your home. This means that over time you will bring in more income without having to pay more to maintain the property.

Here’s a breakdown of how inflation will aid your investment:

  • Rent increases due to inflation;
  • Yet your monthly mortgage payments remain the same;
  • As a result you have an increased cash flow;
  • And a growing demand for housing means more competition among renters and subsequently higher rent prices

Conversely, paper assets are not protected from inflation. On the contrary, a paper asset changes only minimally and does not appreciate the same way the price of a home will.

Historically stock prices dip when inflation rates are at their highest, and with such rates on an upward trend, it’s possible to see such an occurrence in the coming year.

3. You’ll Increase Your Leverage
Leverage, or the techniques used to increase an investment’s potential return, in real estate investing means that you get to use other people’s money to help increase your assets.

In other words, taking out a loan lets you use the bank’s money to purchase your investment–and in some cases you can even make a purchase without using any of your own money.

But consider interest rates. It’s highly unlikely that the government will drop interest rates lower than they already are. The numbers will rise again, soon–maybe even in 2013–and when they do, stocks could be negatively affected.

Once rates rise, the future earnings of companies with stocks suffer, and prices fall if those increased interest rates haven’t been factored into the stock. Your real estate investments, meanwhile, won’t be affected by changes to interest rates if you lock in a low rate before the increase.

Other leverage benefits:

  • You only pay for 5, 10, or 20 percent of the property upfront
  • But you get all of the appreciation and cash flow
  • Once your property increases in value–say by $20,000–you can sell it and buy two separate properties with $10,000 down on each (it’s almost like getting to wave your magical wand and having your investment double)

4. You’ll Pay Less in Taxes
A real estate investment is one of the most tax-advantaged ventures you can partake in. You’ll have the opportunity to save money through a variety of government-instrumented deductions:

  • Depreciation: As your property naturally depreciates in value over time, you are able to deduct some of the home’s cost over time.
  • Interest: Interest from mortgage payments for the property is tax deductible, as well as that of credit cards used to purchase good and services for your investment.
  • Expenses: The costs of gas and vehicle upkeep are deductible for local travelers, and you can deduct airfare and hotel bills if your property requires you to travel a long distance.
  • Insurance: Premiums for virtually any type of insurance–including flood, theft, and fire–can be deducted.

Today taxes are near an all-time low for stocks, not unlike interest rates. Yet the stock market is nearly face to face with the largest single tax increase on dividends in its entire history. This is because come 2013, the extreme tax cuts will reach their expiration date and dividend rates will jump from 15 percent to 43.4 percent. (It will revert to the prior 39.6 percent, plus add the 3.8 percent surtax courtesy of an ObamaCare provision.)

Meanwhile real estate investments with income that exceeds $200,000 ($250,000 for joint filers) will only be affected by the 3.8 tax increase. Despite having the potential to significantly reduce an investor’s earnings, this tax will cut less earnings than those of stocks.

5. It Requires Minimal Time
Spend part of your holiday break investing in your property, and soon it will require little of your attention. As the saying goes, a little time invested now will go a long way later.

A significant advantage to investing in real estate rather than the stock market is the toll it will take on you. Once you begin renting, a real estate investment should not cause you stress or preoccupy your time (barring some unforeseen major problem)–yet the lurching trends of the stock market may leave you feeling queasy and overstressed.

In the initial stage of your investment, you should expect to spend time:

  • Finding the right property
  • Calculating operational costs, or what you’ll have to spend on a regular basis to keep your property (and in a livable good condition)
  • Figuring out how to make your cash flow out of your pockets
  • Selecting renters

After this, however, you will ideally only have to invest time in your property for upkeep and repairs.

You can even hire a manager of your property to take care of maintenance issues or other upkeep, which will require you to devote even less of your time toward your investment.

The Main Drawback
When you invest in real estate, you’re converting your cash into an asset. This means you can’t turn around and liquidate it the next day if you decide you want your money back.

Although liquidity is one advantage that stock investments have over real estate investments, it will only pose a problem if you believe you’ll need a more liquid portfolio for next year. Yet even stock experts suggest that investing in the market be long-term, because should you need to liquidate quickly, you could end up selling your stocks when prices are down.

Ultimately, real estate investments have the potential for a regular cash flow, provide greater tax savings, and are more likely to consistently increase in long-term value.

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