Usreeb - specific advantages to investing in real estate

 Leverage is simply the extent to which debt is used
to finance real estate. Successful real estate investors
optimize (not maximize!) their leverage. The general
rule is "Borrow to buy, sell for cash." More leverage
can make a good investment a great investment.
Wise real estate investors generally look for those
properties that provide the most financing.

 Operating leverage is a characteristic commonly
found in real estate properties due to its large
proportion of fixed cost to total costs. This
characteristic can be described in terms of the
relationship between sales volume and profitability
of a piece of property. Commercial real estate
generally has a large degree of operating leverage
due to its fixed costs.

 Real estate values tend to rise with inflation. In fact,
much real estate often rises faster than inflation
because it is in relative limited supply compared to
other consumer goods and services. Because real
estate supply tends to be inelastic (insensitive to
prices), as demand increases prices will rise faster in
this sector.

 Two important advantages come into play here. The
first is interest costs. Interest costs can be fully tax
deductible for your personal residence (up to a limit)
or for any commercial real estate investment. This
means the cost of funds is reduced by your marginal
tax rate.

 Many individuals want to gain more "control" over
their lives. It is not uncommon for such individuals to
want to "start their own business" to gain more
control over their lives. Commercial real estate is an
activity you control entirely. You find the
opportunities, arrange the financing, bring all the
elements together, and create something where
there was nothing before.

 Commercial real estate investors are debtors. They
borrow money now to pay it back later. In an
inflationary environment this confers a tremendous
advantage to the buyer. In theory, interest rates
adjust for the level of inflation by adding an inflation
premium to the real rate of interest. In the real
world, this adjustment process appears slow and
uncertain.

 A hallmark of commercial real estate investment is
that such investments yield compounding cash flows.
Taking advantage of this requires a fairly long-term
horizon, but that gets back to the tortoise and hare
metaphor. An individual can put $10,000 down on a
well-located duplex apartment that will earn 21%
annually over the next 15 years with very little risk. It
takes a long time, but the $10,000 turns into
$174,494!

 Social policy in the United States encourages home
ownership. This has resulted in financial and banking
policies that make acquiring a home relatively easy.
This happens because houses can be bought for very
little cash up front and interest payments are
subsidized by making them deductible against
earned income. Even a person with very little income
can enjoy the benefits of financial leverage.

Usreeb - specific advantages to investing in real estate

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Usreeb - specific advantages to investing in real estate