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Palos Verdes, CA. Years ago, I discovered that residential rental real estate is the best investment to control risk and create wealth. The Real Estate Digest reports that seven out of ten millionaires made their money in real estate, and Forbes magazine states that there is a three times greater chance of becoming wealthy through real estate than with any other type of investment. Using Real Estate to Control Risks Real estate allows you to control your risk because you can actively participate in the decision making process. Passive investments such as stocks don’t give you this opportunity. Movements in real estate values are less erratic than in the stock market. Most people don’t understand the economic forces influencing the market. Since real estate is less volatile, it’s easier to control and to understand. Real estate is tangible. You can touch it, you’ve been exposed to it all your life, and you can identify with it. Because of this familiarity, you are better able to understand it. Effectively Reducing Your Taxes Real estate ownership continues to be the most popular form of investment because of its potential for substantial tax savings. Since you are able to actively participate in the management of real estate, the Internal Revenue Service (IRS) currently allows qualifying individuals to write off up to $25,000 per year against salary and other income. No other investment gives you this capability. In addition, you can defer paying income taxes on profits indefinitely by using tax-deferred exchanges. Leveraging That Works Real estate is the only major investment that gives you the ability to acquire ownership with very little money down. This degree of leveraging allows you to amplify profits by using other people’s money. The more assets you are able to control, the more opportunities you have to succeed. The degree of leverage is calculated by dividing the total purchase price of the property by the amount of funds used to purchase it. Thus, if a down payment of $10,000 plus a $90,000 loan is used to purchase a property, a 10 to 1 leverage ratio has been achieved. The greater the leverage, the more equity will increase or decrease with the change in value of the property. Why Real Estate Investment Is the “Smart” Way Over 50 percent of the wealth of the world is in real estate. In the United States, real estate accounted for 48.2 percent of the wealth (of which residential real estate represented 36.7 percent). Equity investments (stocks) amounted to 19.3 percent and bonds 21.1 percent. In the past 20 years, residential income properties have delivered the highest average total investment returns of all real estate types. With a built-in hedge against inflation, it is no wonder that multifamily real estate has out-performed all other types of real estate investments with relatively low risk. Based on supply and demand over the next 10 years, residential income will out pace all other types of real estate investment. Strong demographic and financial indicators along with changing lifestyles should continue to positively influence residential income investments. The Three Advantages of Owning Rental Property Rental properties should remain well ahead of other major property types because they are generally more stable. Three important factors account for this stability: 1. They are less dependent on business cycles for occupancy than any other types of real estate investments. It does not matter if interest rates and home prices are high or low, rental properties are generally more affordable. 2. Rental properties have shorter leases; thereby offering greater protection from inflation than the long-term leases associated with other properties. That is, rents can be negotiated more frequently. 3. The pool of tenants is much greater for rental properties than other types of properties. This ensures a more consistent occupancy than industrial and commercial properties, which usually have only a few tenants from which to choose. RENTAL PROPERTIES-THE COMING BONANZA FOR YOU Supply and demand play an important role in residential income property value. The demand for rental property is increasing because the number of people entering the rental market is increasing steadily each year. At the same time, construction costs, stricter zoning ordinances, and environmental factors are limiting the new construction of residential income property. Together, these trends bode well for investing in residential income property. Because the 1997 Tax Act allows joint owners to exempt capital gains of $500,000, more and more people are selling their homes, saving their money, and moving into rental property. It is estimated that the demand for rentals is likely to increase over 10 percent during the next 10 years. Residential income property offers one of the best protections against inflation. In fact, a study reported by the Journal of Financial Economics found that residential real estate is the only investment that offers a complete hedge against both anticipated and unanticipated inflation. People always need the three basics - food, clothing, and shelter. As the population grows, the need for shelter grows along with it. The hedge against inflation with residential rentals is greater because, unlike long-term commercial leases, they are generally on a month-to-month basis. As prices increase, rental property owners can increase rents more rapidly with month-to-month leases than commercial owners who have long-term leases. Residential income property is one type of investment that is a source of security and stability. Every investment has peaks and valleys, including rental real estate. Nevertheless, over the long-term, it always comes out on top. The key is knowing the right time to buy and sell. That is the golden rule in investing. Real Estate: The Shock Absorber Real estate generally outperforms equities because of its higher yields, greater price stability, and downside protection even in a recession. When stock markets are down, real estate holds value and produces a positive return. Real estate is less prone to booms and busts than in the past. Residential income-producing real estate is now stronger than it has been in many years. Since rental properties can be seen and touched and are not an abstract form of ownership evidenced by a piece of paper. They are investor friendly. People can identify with doors and windows, bedrooms and bathrooms, and floors and roofs. They do not feel that the market is being manipulated by programmed buying and selling. They have control over their investments.
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