Real Estate Investing
Real estate investing has long been a favorite way to diversify one's portfolio. The majority of wealthy clients that I have worked with over the years have owned some sort of investment real estate, and many of them used it as their primary investment vehicle. But many people still shy away from it for fear of the three T's: Tenants, Toilets & Trash. Not to worry, there are easy ways of getting around these headaches if you really have an interest in real estate. Advantages of Real Estate Real estate has many advantages. One huge advantage over other types of investing that makes it very attractive is leverage. By leverage I mean the ability to easily borrow money from someone else (usually a bank) to finance your purchase. Assuming that you can make the loan payments OK, this ability to borrow money for your investment helps you to accumulate wealth much faster. For example: let's say you buy a rental house for $100,000. You only put down $20,000 of your own money and borrow the remaining $80,000 for this purchase. As this house appreciates over the long term (which eventually it will), let's say it appreciates at an annual rate of 5%. This means that in 10 years, that house will be worth $162,000. At this point, your loan balance (assuming a 7% interest rate, 30 yr. fixed mortgage) would be $68,649, giving you equity in the property of $93,350. This means that your $20,000 investment has grown to $93,350 in 10 years which is a 16.65% annual rate of return! That's a return that would be hard to beat in any other type of investment over the long run! Another advantage of real estate investing is that of tax deductions. With most investment real estate, you are able to take plenty of tax deductions (as long as it's not owned by your IRA). You can deduct the mortgage interest if the property is financed. You can deduct the cost of any repairs made, as well as any tools purchased and used to repair the property. You also get to depreciate the value of the amount financed to purchase the property over a 27 1/2 year period which is another HUGE deduction. 
Back to the previous example: That $100,000 home that you bought and borrowed $80,000 to buy has appreciated quite nicely over the 10 years since you bought it. Not only has your rental income covered the mortgage payment for you, but you have gotten some nice tax deductions as well. By depreciating the $80,000 over 27 1/2 years, you'll be able to deduct $2,909 ($80,000 divided by 27 1/2) each year for that you own the property. This deduction alone puts hundreds of extra dollars each year in back into your pocket in the form of a tax deduction.
Another advantage of real estate investing is cash flow. The cash flow from investment real estate comes from rental income. Your renters, or tenants make rental payments to you that will ideally be large enough to cover your mortgage, insurance, repairs & tax payments on the property. Initially, if you can break even each month you're doing pretty good. Eventually you will be able to have positive cash flow from the rental income. By this I mean that your rental income will be more than your mortgage, insurance, taxes & repair costs. This cash flow can eventually be a great source of retirement income, and that's why real estate is a great component of personal financial planning. Avoiding The Headaches Back to the three T's that scare a lot of people away from real estate investing. Tenants, toilets & trash. If you really don't want to deal with tenants, fixing broken toilets, cleaning up trash, etc., you can hire a property management company to do this for you. They will take a percentage of the rental income that your property brings in, but this may be worth it for you to not have to deal with it. Real estate property management companies will commonly find and screen potential renters, field phone calls from tenants, make arrangements for handyman repairs, etc. If you are trying to build up a portfolio of investment real estate part-time, this may be a great way for you to go. You'll have to evaluate your situation to see if you can afford to pay someone to take care of these things for you. For commercial mortgage expertise in the UK please contact MCI Commercial Mortgages UK Commercial Mortgage and Finance Specialists Go From Real Estate Investing page back to Investments page
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