Hey, guys. Mat here from Keyrenter Tulsa, available for you always at (918) 351-7000.
Today, we’re going to be talking about the seven benefits of buying and holding real estate as an investment. Without further ado, I’ll give you number one: cash flow. There are not that many assets that will pay you every single month, that will provide cash flow every single month. In the case of real estate, what you’re doing is you’re exchanging security, the roof over somebody’s head, for cash, for dollars, and that will provide you cash flow every single month. Preferably, if you use a property manager, you’re going to have very little headache, so it’s going to be a purely passive investment. You’re going to provide a home, somebody’s going to give you rent, and at the end of the month, you collect that.
As an example, what you see here is rent that starts out in year one at $1,500, appreciates every year at 3%. Now, that could be 2%, depending on your market, or 4%, sometimes more. In our market in Tulsa, generally speaking, we’re going to see 3% rental increases. After 30 years, that looks like $3,600, so you’ve more than doubled the amount of rent that you collect every month after 36 years. We also see here in this example that cash flow dramatically increases after 15 years when you pay off your mortgage, in this case, on a 15-year note. You start of with a couple hundred bucks every month, and that grows over time as your rent steadily increases and, at 15 years, that increases dramatically, and you see that steady growth continue over time.
In addition to that, and on a 30-year note now, what you see is an example of a $200,000 house where you’ve borrowed 75% and put up 25%, in this case 50,000. You’re going to have a decreasing mortgage principal. You have principal pay down over time, of course, and that means that you owe less and less over time.
Number two, appreciation. Everybody loves appreciation, especially on real estate. What you see is that, when you buy a $200,000 house, over time, it’s going to increase. It’s not going to increase every year. It’s not going to increase a guaranteed amount. We don’t know if it’s 3% or 5% or 10%. Generally speaking, in Tulsa, it’s between 2 and 4% again, which is why rents generally increase between 2 and 4%. What you see is, despite ups and downs, generally speaking, historically, it has gone up. What you have, after 30 years, is a steady appreciation of your asset.
Talking about appreciation, we have the tax implication of the depreciation, on paper at least. I’m not a CPA. I don’t play one on the internet, but talk to your CPA or your accountant to talk about the tax implications of depreciation. In general, what you see is, on the land value, in this case on our $200,000 asset, we’re going to say 75,000 is dedicated to land value, and that does not depreciate, but the structure does depreciate, and it generally depreciates on a 27-and-a-half-year timeline. Over time, you have paper gains where you can write off depreciation against the income that you make on that asset, reducing your liability on the tax front. Again, talk to your CPA about how that might affect you.
Number four is one of my favorite personal reasons why investing in real estate’s a great thing. Warren Buffet commented on it many times or has commented on it many times, that if he could put together a portfolio of single family properties and lever those properties, use leverage for those properties, he definitely would. What you see is that, on a $200,000 property value, again, if you’re putting down 75 … sorry, putting down 25% and taking a note for 75%, you’ve put down $50,000 of your own hard-earned cash.
If the asset appreciates 3% in the first year, what that means is you’ve made 3% of $200,000 is $6,000. Now, on your cash, that’s going to be a lot more, so you’ve made 3% of the asset value, but you’ve only put in 50,000. If you make $6,000 on $50,000, that’s 12%, 12% appreciation on your cash before having a conversation about depreciation or about cash flow or anything else, expenses, other things that you write off against a business. That is a great number, 12% strictly appreciation on your cash. Again, add in everything else, principal pay down, which is equity growth, depreciation, and you have a much higher return.
Number five, write offs, a wonderful thing, legal according to the tax code. Again, consult your CPA on this, but you can write off expenses for your business because you are running a business. It focuses on real estate, and you can write off a number of things. If you travel to visit your property if it’s in another state, if it’s in another country, you have the ability to write off those travel fees, travel expenses rather. In addition, you can write off management fees, repairs, utility expenses, accounting fees, insurance, and a bunch of other things. Talk to your CPA about how you can write these things off, legitimate business expenses, against the income that you make on your real estate.
Six, real estate is a tangible asset. Unlike other investment classes or other investments that you can make, there’s no grabbing for paper. It’s real. It’s a tangible thing. You can go see the brick and mortar that hold your home in place, your property in place. You’re not scrambling to understand complex metrics around property. You’re not scrambling to understand complexities in the industry and a bunch of other things. This is a real physical asset that you can go visit. It’s not dollar bills floating away in the case of many people’s investments in 2008, for example, 2009 where asset values declined precipitously and dramatically over the course of days, weeks, or months.
Your value that you have from real estate it never going to go down to zero. The land will always be worth something even if, God forbid, a tornado wipes the whole thing away. You still have land value, and you have insurance that covers the rebuilding of that asset, so it’s never going to go down to zero. It’s always going to be worth something. Again, brick and mortar. You can see and touch and feel it, and that’s an important element of the ownership of real estate.
You have options. Unlike other asset classes, you can hold the asset, you can sell the asset if you need the money, you can owner carry or finance somebody else’s acquisition of the asset, and if things really turn that way, you can always go live in the asset. There’s never a possibility of not having something to do with a piece of property that you own. You can always take advantage of a number of different opportunities to make money with that asset.
Again, this is Mat from Keyrenter Tulsa. We’re available all the time at 918-351-7000. Give us a shout if you’d like to explore buying a rental property, buying and holding an investment property, or if you have one already that you’re interested in discussing with us. We can run through a number of scenarios, options, provide you data on how to make your property work for you. Thanks.