Whether the Indian market is booming or busting, there is one kind of market where you can always find deals and make money: the real estate market. This market is arguably the best market that a person can seek to invest in, and in this article, we are going to outline the reasons for why that is.
Furthermore, we will show you some of the myriad of ways that you can get your feet wet with real estate investing. Another thing that makes the real estate market so great to invest in is that you don’t need a lot of money to get started, which makes it great for young people.
Reasons Why You Should Invest in Real Estate From a Young Age
As I mentioned above, real estate is arguably the best investment that an investor can make. This is because real estate does three (and maybe four) things:
- It generates cash flow.
- It builds equity.
- It allows for depreciation.
- It can potentially be appreciated over time.
Furthermore, if you decided in your twenties to invest in real estate directly through rentals and the like, many young people can qualify for a Federal Housing Administration (FHA) loan that only requires a 3.5% down payment and has a traditionally low-interest rate. That makes the real estate market accessible for people who may not have the 20% down payment that a bank would charge for a mortgage!
Real Estate Produces Cash Flow
Cash flow is, by definition, the movement of money via revenues and expenses. Real estate investing provides an investor with the opportunity to generate positive monthly cash flow. If you directly purchase a property and then rent it out to tenants, the rent you charge may pay off all of the monthly expenses for the house and even chip away at the mortgage for you. On top of that, you may get to keep a little bit of positive cash flow for reinvesting each month! Of course, calculating your monthly expenses and accurately forecasting how much you can charge in rent before purchasing any property is critical to making sure that the properties you purchase will be cash flow positive.
Real Estate Builds Equity
As that cash flow is continually generated, your mortgage on your property will be paid down a little bit each month. Over time, as those mortgage payments begin to chip away at the principal of the loan, you will accrue equity in your property. This equity can be used as a store of wealth, as a back-draw for loans, and even as collateral in other types of agreements.
Real Estate Can Be Depreciated for Tax Purposes
This is where purchasing real estate becomes exciting. The government currently allows a commercial property owner (someone who buys properties for investments) to depreciate their property over a designated period. This depreciation can be applied against one’s tax bill each year in the form of a deduction.
It is this principle of depreciation at work in real estate that leads investors to think of investing in real estate as " generating money out of thin air " which is sort of what depreciation is.
Real Estate Can Appreciate in Value
Finally- the icing on the cake. If you can purchase properties at the right price and at the right time in the right locations, you will find that those properties will appreciate over time. While this appreciation can’t always be expected, your equity in the properties you own may increase as a result of appreciation.
How You Can Invest in Real Estate
Now, all of the benefits that I have just described have mostly applied to rental real estate, which is sort of like the " ultimate form " of real estate investing because it offers so many perks. However, not everyone is cut out for being a landlord and managing tenants. With that said, there are a couple of other ways that you can invest in real estate without having to manage it directly.
Direct Partnership Plans
Direct Partnership Plans, or DPPs, are another type of investment that allows investors to get in on real estate (as well as another sector) action without having to directly manage anything. Under this type of investment, an investor will subscribe to being a limited partner with an investment firm.
That investment firm, made up of general partners that manage the day-to-day activities of the firm, will aim to fulfill an investment objective as laid out in their prospectus. Limited partners (i.e. you) are allowed to share in the profits (and losses!) of the partnership but are limited only to losing their principal investment.
General partners are encouraged to manage the business well because they usually have much higher liability than a limited partner if the business fails. Also, limited partners are not allowed to be involved with the day-to-day activities of the investment company or they could lose their rights to their limited partner status.