Real estate has long been regarded as a preferred asset class for wealthy investors.
Setting aside the somewhat dubious but oft-cited claim by Andrew Carnegie that real estate has made more millionaires than anything else, more recent and reputable indicators include:
– Warren Buffett’s recommendation to purchase single family homes
– TIGER21 – the exclusive mastermind group for high-net-worth investors – publishes a quarterly list of the aggregate holdings of their members. Real estate is currently – and usually – the single largest asset class
Most investors will approach the real estate asset class through the vehicle of single-family rental properties, giving rise to the question:
Is single-family rental property investing a wise idea?
The answer is simple: Yes, it certainly can be very wise to own rental property for many reasons:
1. It’s a wonderful experience to get paid every month with little or no active involvement
2. Real estate, if even somewhat well selected, tends to increase in value year-to-year without your active involvement
3. It’s very simple to get financing for larger purchases (though this certainly increases your risk)
4. In the United States, real estate is extraordinarily favored from a tax perspective. Depreciation enables many real estate investors to substantially reduce their income taxes each year, while 1031 exchanges make it possible to defer capital gains taxes practically forever
5. It’s totally legal and pretty simple to invest your retirement in real estate through a self-directed IRA, though this should certainly be done with care
6. It’s quite possible and realistic to purchase and profit from rental property anywhere in the country by using a good property manager.
7. If you have limited experience as a rental property investor, there are many great turnkey rental property options available… these are houses that are fully renovated, occupied by a paying tenant, and under the care of a professional manager… and all of this is in place at the time you purchase the property
As great as a rental property is as an asset class, it’s certainly not without risk, and you should familiarize yourself with those risks which can include:
2. Property Damage
Fortunately, these risks can be very substantially mitigated through the use of insurance and wise management.
The keys to success in rental property investing are:
1. Always view rental property investments as a long-term investment. You’ll lose more to transaction costs than anything else by frequently trading in and out of different properties
2. Understand the difference between being a landlord and being a rental property owner. The former is actively engaged in the day-to-day management of properties and tenant relations. The latter owns the property and receives the benefits. Strive to be an owner, not a landlord.
3. Hire great property managers, and trust them to do their jobs. But always check up on the work they are doing at least once per quarter, just like you’d do for a stock portfolio handled by a third-party manager.
Rental property investing is not for the faint of heart. Yet the experience and activities of highly respected and very savvy investors give us one clear message over and over: Real estate investing is a highly trusted asset among savvy investors for becoming and remaining wealthy.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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