When you mention real estate investment in most areas of the country these days, all people talk about is how much value properties have lost. We became spoiled the last few years as the real estate values skyrocketed. We forgot the fundamental reasons of investing in property, long-term investment and equity building. We focused on the short-term value increases. Of course, no one wanted to face the fact that the increases couldn?t go on forever and eventually there would be a market correction. We certainly didn?t anticipate what has happened recently!

Now the dust has settled . . . it is time to go back to the fundamentals. Except for unusual circumstances, real estate investment is a long-term investment strategy, not a get-rich-quick scheme. Here are six fundamental principles to take into consideration when looking at property investment.

1. Income generation: Except for the home you are living in, when purchasing property you are looking for someone to rent or lease the property. The rental payments you receive are income that you then use to pay the mortgage and associated expenses for that property. Ideally, the rent you receive from a piece of property will cover all your expenses and have extra left over.

 

2. Equity build-up: As you receive rent payments from your tenants and pay the mortgage, a portion of each payment goes to interest on the loan and the rest goes to paying down the principle of the loan. By paying down the principle, you are building equity. That means you are increasing the amount of the property that you ?own.?

 

3. Tax advantages: Your rental property is considered a business. Therefore you can take business tax deductions associated with the property. For example, depreciation. The IRS allows an owner to depreciate buildings over time, and a good accountant will be able to help you take advantage of this law. Your accountant will also be able to show you other tax deductions you will be able to use in your rental business.

 

4. Leverage: You can have control of a piece of property without having to pay for the entire property upfront. You do this by using OPM – Other People?s Money. OPM allows you to leverage your investment and use the income generated to pay off the mortgage and gain equity. You will make much more on your money by leveraging your investment than if you owned the property outright. A drawback to this is the higher level of risk some people are not comfortable with.

 

5. Local Markets: Residential units, either single or multi-family, are bought and sold in every city and town around the world. You will never run out of possibilities. The key is to do your research for the area(s) in which you want to invest. Learn everything you can before you start investing, and don?t be afraid to talk to people who have knowledge about the area.

 

6. Buying Below Market Value: Now is a great time to find properties that are being offered below their market value. Unfortunately, the lending practices of the last few years have put people in a difficult situation, forcing them to sell their house below market value. Other reasons include job transfers, divorce, job loss, or change in financial condition. You may feel that you are taking advantage of people in a difficult situation, but if you are fair and equitable in your dealings with them, you will actually be helping them get out of a bad situation.

The six elements listed above are the foundation of most long-term real estate investors. There are great deals to be had for someone who is serious and is willing to do the work involved. Remember to always consult with your attorney and accountant before investing in real estate.

Tags: investment, making money, Real Estatement, tax advantages