This week we interview Ralph Germain about the benefits of investing in real estate syndications and how to start out your real estate portfolio in syndication investing.
5 Benefits of Investing In Real Estate
By: Ralph Germain, REILVEST (Co-Founder and Director of Investor Relations)
These days, there are many options for investing. From the tried and true methods of investing such as mutual funds and bonds, to the more risky and volatile options like stocks, cryptocurrency, NFT’s, and the metaverse. It’s all a delicate balance of risk vs reward. One of the tried and true vehicles for investment is real estate. While many investors think you need a large amount of capital or an incredible amount of time to invest in real estate, the truth is you can invest in real estate with limited capital and if you partner with others as a passive investor it can require almost no time. But what are the benefits of investing in real estate as opposed to other options like stocks, bonds, or crypto? What advantages do you get from investing in real estate as opposed to a tech startup or opening a restaurant? The list of benefits for investing in real estate is exhaustive and impressive. And I’m not just saying that because I am a real estate investor, but when compared to other investment vehicles, real estate is unrivaled. Here are just a few of the most attractive benefits when it comes to investing in real estate
Cash flow is defined as the remaining cash from income received after all expenses and debts have been paid. Unlike stocks, and bonds, Real Estate is one of the few investments that provides a generous cash flow depending on the deal and the property. Whether monthly or quarterly, cash flow from rental income is consistent and reliable. The additional income also helps with your current expense to income ratio, giving you more financial flexibility. If you are thinking about retirement, cash flow from real estate investing provides a cushion for retirement earnings. If you work full time, cash flow from real estate investing combined with your wage income can help you leverage your time better. Meaning you may be able to work less because of the additional income you are getting from a cash flowing property. The biggest thing to understand here is that the cash flow is consistent and reliable. Every month tenants are paying rent, and that rental income is the basis for cash flow. While some stocks offer dividends to their investors, those dividends are usually paid quarterly, with some companies paying semi-annually or annually. And the dividends are typically much less than the cash flow that real estate usually returns. The S&P 500′s average dividend yield for example, is approximately 2.00%.
Appreciation is what happens when the value of property increases, and it is no secret that the value of Real estate tends to go up over time. In fact over the last 10 years, property values have grown by more than 50%. National appreciation values average around 3.5 to 3.8 percent per year. So investing in real estate (in addition to the cash flow) provides investors the opportunity to make an almost certain winning bet that their investment will be worth more in the future. This is not the case with other investment options like investing in a tech startup. While an idea from a new tech company may prove to be revolutionary initially, there is always a newer idea, a smarter app, or better option that causes that revolutionary idea to become an unnecessary commodity. However, people will always need a physical place to live or run their business. They haven't created the app that can replace that yet. Therefore the necessity of real estate is what almost guarantees its appreciation
In addition to natural appreciation, there is what's called forced appreciation. Buying an old car and restoring it to its original condition and operational performance causes that old hunk of metal to be worth more. In the same way, buying an old or distressed property and fixing it up increases its value. This is what we mean when we say value-add property. In some cases, just a little paint and updating to the appliances can increase the value or rental potential of a property exponentially. Or you can increase the rents if they are below what other comparable units in the area are going for. That will increase your income the property is generating, and thus increase the value of the property. You can also modernize your operations and optimize your expenses for even more added value. I can’t think of any other investment opportunity where you can force it to be worth more.
Tax Savings & Benefits
Although every investor is different, many have a few things in common. One of things most have in common is trying to figure out how to keep more of your own money. One of the most attractive benefits to investing in real estate is the tax savings it provides. Many of the expenses involved in owning/operating a rental property are tax deductible. Things like insurance, interest, property management fees, repairs, capital improvements, or ongoing maintenance can all reduce your tax burden. Another tax saving tactic is depreciation. You can depreciate the cost of the property over time as long as you have owned if for more than a year in most cases. By depreciation, I mean you can deduct a property's loss in value over its expected life. Meaning to the IRS, the property will be worth less year after year on paper, while in actuality it is increasing in value. Depreciation as a tax strategy can ONLY be used on investment properties, making it a unique tax advantage that you can only benefit from if you are a real estate investor. Once you do decide to sell an investment property, the profit from that sale will be taxed as a short-term or long-term capital gains, which is typically a lower tax rate than ordinary income tax. Long-term capital gains, which means you’ve owned the property for at least a year, are taxed more favorably, from 0% up to 20% depending on your tax bracket. If that's not enough, there are other options that defer or avoid you paying taxes all together. The 1031 exchange tax option, for example, gives investors the option to defer paying capital gains taxes altogether if they use the profit from the sale to purchase another property. I’m not a CPA or tax accountant, so before you invest in real estate, discuss your goals with a tax professional.
Protection from Inflation
Inflation has been the talk of 2022 so far. With the rising cost of goods and services, as well as the ever- increasing cost of living caused by inflation, the buying power of each dollar is less and less every year. Keeping cold hard cash in a bank account means you are losing money as inflation rises. Because the cost of everything else is going up. Real estate provides natural protection from inflation. As prices rise, and as the buying power of the dollar decreases, the cash flow you get from the property also increases. If home prices rise in your market, rents will also naturally increase. So investing in real estate provides you with the ability to keep pace with inflation.
If you are thinking about investing in real estate, besides considering this short list of benefits here, you should also consider the risks involved. Real estate, like every other investment, has inherent risks, that if not managed or properly mitigated could cause loss of capital. But even with the risks, real estate is pound for pound the best investment vehicle for financial flexibility, time freedom, wealth building, and creating passive income.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.
About the Author
Ralph Germain is the Director of Investor Relations for REILVEST, a multifamily syndication company focused on the freedom and benefits that passive real estate investing provides.
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Today's Guest: Ralph Germain
Ralph Germain is an investor and entrepreneur, in addition to working non profit. Ralph is co-founder of Reilvest, a real estate syndication firm, but his career did not start out in Real Estate. Ralph graduated college as a first generation grad, and started working for Bank of America. Although, making a lot of money, He did not quite feel fulfilled so he decided to work non profit at an alternative High school as a counselor. Ralph was continually promoted and worked his way all the way up to Director of a High School until they lost a major funder, and unfortunately, he was laid off, and that's when he discovered that although the work was fulfilling, I was not financially secure. That's when I found real estate.
Fast forward a few years later, Ralph and his partner (Dhanesh Shelat) now own 400+ units in their real estate portfolio across NY, OH, and TX, and they continue to grow their business. Ralph still works full time as a Director for High School with 3000 students. Among all these accomplishments, his proudest is being a girl-dad.
Ralph's Online Presence:
- Kirk Chisholm | Innovative Wealth
- Barbara Friedberg | Barbara Friedberg Personal Finance
- Megan Gorman | The Wealth Intersection