By: Vidit
This document offers a small intro to RE investing. It answers three questions:
RE has a few interesting benefits:
The biggest benefit is consistent cash flow.
Eg - Buy cost = $100,000,
Rent = $1,000,
Mortgage = $400
All expenses = $400.
Then cash flow per month is $1,000-$400-$400 = $200. If you paid $24,000 initially for a total downpayment.
Your cash return alone is ($200 x 12)/$24,000 = 10% đł.
Principal Paydown
Part of the mortgage will go toward interest
But part of it will build equity as the principal gets paid
For me, that's about 10% on my current portfolio, and it increases every year as more of the payment counts toward the principal.
Asset Appreciation
This one is self-explanatory.
If you buy in the right market, this is the cherry on the top
I never bet on it, but I buy in markets that have grown 11% YOY
If I sell now, I will make a ~ 30% annual return on my initial investment, including appreciation
Tax breaks
You don't pay taxes on the rental income via concepts like depreciation, cost segregation.
You can also leverage write-offs through the partnership LLC
When you sell, you can apply the 1031 exchange concept and even defer any capital gain taxes.
Diversification and upside potential - In the right market, RE has inherent potential energy for extreme upside while offering diversification to minimize downside: the best-performing assets can 20+% annual return in a 5-7 year period. This is the nature of the right acquisition strategy + efficient operations: some assets get big and skewed returns.
Compare this to investing in a stock index fund: you get diversification, but you neutralize the potential for massive, outlier returns.
And compare this to individual stocks: you get the potential for huge returns (although not often 20+% annual avg. in 6-10 years) but not diversification. Plus, you have to stomach the recursive volatility of trader sentiment.
You are compounding deal flow and relationships. If youâre investing directly with a competitive GP, you can build on the relationship for future deals. This deal flow access can become a flywheel leading to a competitive advantage. In RE, relationships matter more than everything else.
Reduced stress due to less-perceptible volatility. Some investors find RE less stressful than stocks or cryptoâand every other asset with a high frequency of performance fluctuations. If youâre an investor who factors the cost of stress into your investments, you can âset it and forget itâ with RE and not worry about looking at Robinhood or crypto-token prices every morning. This seems like a small benefit, but itâs meaningful for many.