Blue Ridge Real Estate

In comparing real estate investing to any other type of investing, the biggest positive difference is this idea of leverage. For instance, should you decide to invest in stocks and bonds, your investment is limited to the number of dollars you can actually invest – hard cash. Now some might protest that stocks can be acquired “on margin”, and though this is true to a certain extent, it is nevertheless a poor comparison. Buying stocks on margin is very risky business, much more limited, greatly regulated, and subject to “margin call”. And where can you go to borrow money so as to invest in any other commodity, and yet in real estate as long as one has good credit, and a plausible business plan and good investment sense, it is very much possible. Why? Because real estate is the foundation of all other investments and if done right is as safe and secure as any. Even interest rates for this kind of business borrowing is lower than most.

But now for real estate “buying on margin”, or in real estate this is referred to as leverage, is the very common and safe practice of employing borrowed monies to increase your purchasing power, and thereby to multiply significantly the profitability of that investment.

Here’s an example: Let’s say that Tom wants to invest in a parcel of real estate and is considering what is the most lucrative manner in which to go about this. The property he’s interested in is for sale for $100,000 and will produce a yearly net return of $10,000. If Tom decides to purchase this piece of property with all his own money, he will then enjoy a yield of 10%, neglecting administrative and maintenance fees for simplicity of example. (10,000 / $100,000)

But now say Tom decides to borrow $90,000 at say 8% interest and to use only $10,000 of his own money. Now, of course, he will be realizing less money out of this property, for he must pay the banker $7200. He now takes home only $2800. But, since his only investment into the property is $10,000, his rate of return is much higher now, an incredible 28% - ($2800 / $10,000). You could say that the leverage this investor is using raises his rate of return by 18% and if he puts his entire $100,000 to work at that rate his return will be nearly three times what it was without it.

Add to this that most investment property in America produces a healthy return and a positive cash flow for its investors. Nevertheless, the way the tax laws are written, even such property with a positive cash flow turn into tax write off against the earned income of its owners. This occurs through depreciation and costing methods of accounting which are completely above board. In actuality, as an incentive to real estate investment, which again is the very foundation for all other enterprise, the government allows for attrition and obsolescence when there really may be none. All assets do in fact depreciate in value whether they be auto, machinery or houses. But historically real estate is the one commodity which, though it is subject to this law, still does continually increase in value. One reason the government is so liberal in their tax allowance is to provide incentive for upgrading and modernizing.

So, property tax shelter is quite an anomaly in comparison to other opportunities of investment. I personally know of no other such vehicle that provides an equal return. Some investors even go to the extent of hiring a chattel appraiser after they have purchased a property. The appraiser goes in and puts a valuation on all of the accoutrements of the property to include drapery and blinds, light fixtures and appliances – the works. When these are added to the real estate proper it raises significantly the bottom line.

So, in effect, not only is Tom leveraging his return with borrowed monies, he also gets tax benefits from his investment in real estate.

One word of caution is due. Remember that leverage works both ways, so that if the price of real estate goes down or there are real losses, one loss is leveraged upwardly in the same fashion. The key here is to know your investment and investment strategy and to work your plan well.