The Pros And Cons of Real Estate Investmets

Let's start immediately with pros and cons of real estate investing so we can demystify all the ideas, purposes and beauty behind it.
Including real estates in your investing portfolio as an asset class, adds diversity to reduce your overall investment risk as this asset class is not directly correlated to stock market. There are many real estate investing strategies to achieve this. We shall explore some.

Like any investment, taking on real estates in your investment portfolio has its pros and cons. In this chapter of our internet site, at AM Investments, our goal is to make people and company leaders working in different industries, that is to say investors feel comfortable investing in real estates through passive approach by acquiring real estates securities or being an active investor by acquiring actual real estates located, here, in Republic of Serbia.

Pros of Real Estates Investments

1. Real Estates Value Appreciates Over Time

Real estate value, generally, appreciates over time at the rate that outpaces annual inflation.

Like in any type of investment, market corrections are possible, and you want to buy proper type of equity at the right time.
Possibly making improvements can further increase value of real estate asset. Unlike other asset classes real estates is a tangible asset that will always have value derived from both the raw land and the "improvements" like building structures attached to the ground.

2. Real Estates has unique tax treatment

Real estatee investors fulfilling certain conditions specific for each county can avoid paying the capital gain tax from real estate investment in full or partially.

Capital gain tax is a percentage of gain investor realised by selling real estate which in meantime appreciated in value and now owes to the state. For example, according to Italian law if an individual (not a company) hold real estate longer than 5 years she is not obliged to pay capital gain tax to the state even if the property was bought for investment purposes. In US if you after selling a property and buying a more valuable one according, you are also not obliged to pay capital gain tax. Here in Serbia similar rules apply when selling and buying afterward new property.
However if you are interested in specific tax rates and treatment of each individual asset class covered, that is, promoted by AMI ltd. you can check in more details on our website under the chapter: 51. TAXATION EFFECT UNDERSTOOD

Real estate's unique tax benefits allow investors to grow their wealth over time. Rental income is not subject to self-employment tax.
Furthermore for example in USA government offers tax benefits to real estate individual investors. These include depreciation and significantly lower tax rates on "long-term" profit from investments that is profit that is realised after holding an investment for a longer period of time. Rental real estate is perceived as a business even for individual investor not a company. This means many expenses, such as travel costs to check on your properties, and other cost in relation to real estate are tax-deductible expenses of running your business. Among others depreciation is important tax advantage. The IRS allows individual to deduct the cost of the property over 27.5 years which decreases the overall tax amount to be payed to the state in relation to gains from investing in real estate.

The advantage of real estate investors is that you are depreciating an asset that rarely lose value. In fact, property values tend to go up over time. That means you get a tax credit on the cost of an asset that may be going up in value, not down as tax credit is an amount of money that taxpayer can subtract from overall taxes they owe.

What is more, depreciation is a tax credit that is on top of property upkeep and other costs that you can take away from the rental income. This later applies for individuals and companies alike. That means more money that you can use to pay of the loan you took to buy a real estate or buy more properties, invest elsewhere or spend.

3. Real Estates Provides Steady Cash Flow

Rental properties once rented provide a steady flow of monthly income so called cash flow.
This is the extra money that is left after all the bills have been paid. This is monthly income that is mostly passive allowing you to spend your time elsewhere like building your own business, spending time with family, or reinvesting in buying more real estate.

We say mostly passive as some of the engagement by you as an owner might be required from time to time (like deciding to whom to rent, occasional repairs or improvement etc.) if you haven't outsourced this to some management company who will do this for you for a certain monthly fee which deducts from monthly income.

4. Real Estate Lets You Use Leverage

The beauty of real estates is that an individual investor (as well as a company) can use the power of leverage to quickly grow real estates holdings on the path to building wealth.

Real estate can be an incredibly powerful wealth creation strategy, but only if you work it right. More on understanding on how the leverage strategy works read in more details in the part of this chapter: More on Leverage Strategy And Risks Of Leveraging Too Much".

So what is leverage? In this case when we talk of investing in real estate leverage is action of using borrowed capital to purchase another property. Borrowed capital ie. loan is approved by the bank given the condition that it places mortgage on existing property. Leverage, when used wisely (meaning taking minimal risks), is a powerful advantage of real estate investing.

In other words using a conventional loan, investor can buy an investment property with a 20% down payment. The rest 80% of capital she is able to request from the bank in order to buy the property in mind. So, for example, with an initial investment of $50,000, you get the opportunity to control, and get all the benefits of owning an asset worth $250,000.
Done with proper due diligence (analysis of property itself and its market perspectives), you can build your wealth exponentially using leverage, especially in the low interest-rate market we're currently enjoying.*

* This text was written in first half of 2021, so when making an investment decision one has to be aware that this market conditions in interest rate market might not apply. Furthermore AMI ltd. here is not a purpose to give financial investment advice but to promote investment in general and its business partners. If one decides to invest, must be aware that it might lose part or all investment capital.

5. Real Estate Builds Equity

When you take a mortgage loan for investment purposes, and you rent it out, your tenants are actually buying the property for you. Rental income pays down your loan each month and builds equity for you, thus increasing your net worth each month.

For example, today you might owe to the bank $ 250,000 for previously buying what it now functions as a rental property. The following year, you might owe only $ 240,000 because the tenant is making the payment for you, making you $ 10,000 richer.
Twenty five years down the road (or whatever the term of your loan), it's paid down to $0. You own a significant asset that you can sell or continue renting, all thanks to your tenant paying the mortgage.

Furthermore, you can sell the property before end date of your loan, transfer the mortgage on the new owner and cash in all the equity that you build thus far. Or in in other words if you sell the property, from the example above, 10 years down the road, you can transfer rest of the loan of $ 150,000 on property buyer.

Buyer pays you back amount that consists of downpayment of, usually, as a good practice, is 20% (in this example $ 62,000) of initial property value($ 312,000) at the time of purchase plus amount of loan you have already paid or $ 100,000.On top you earn proportional amount by which the property rose in value. If property value grew to $ 400,000 in 10 years you relayed 40% of the loan plus downpayment of all in all 48% of achieved price is yours All in all you are richer buy $ 100,000 plus some, and that some is $ 30,000.

The numbers stated here are not presented for purposes of financial advice but rather mirroring reality in a realistically scenario.

To summarize

Initial Price	Downpayment (20%)	Mortage Loan (25 yrs)	Yearly Net Renting
$312,000	$62,000	$250,000	$10,000

After 10 years

Loan Repaid (40%)	Current Value (hypotetical)	Cash Flow	Total Return
$100,000	$400,000	$196,000	$139,000

6. Real Estate Investing Gives Control

In a nutshel, you have more control over your investment compared to other investment classes like securities stocks, bonds securities and portfolio investments.

In order to sit in the boardroom and steer management decisions that influence the value of the company stocks you need to have a significant percentage in the stocks issued of that particular company aside from desired qualification and experience required in a particular industry where the company operates.
Or when considering investment fund with which you placed your funds you need to be professional investor employed by a particular fund in order to make certain decision of here and when to invest. With real estate investing, you are in the driver's seat of a lot of decision making. You can mitigate risks and grow your portfolio at a much faster pace.

As a first step you can invest your free time in searching for a quality real-estate that is underestimated in price, or you know that the neighbourhood is going to develop and you are buying in time before prices go up, or you see positive economic trend and you know a lot of people with new jobs and increase in salary will look for a lace to live and work, or somebody needs to sell fast and you are in cash or you can hire quality professional to do these and other thing in a experienced way and at the end of the day you can negotiate, envisioning all sorts of strategies.

Furthermore, In a competitive rental market, I employ strategies to make sure the best tenants are attracted to my properties.
In addition to all stated I can make strategic improvements on a property itself to increase rental income. Also when it comes to financing there are available options you can chose from or negotiate with a bank, making your own private, individual business plan and strategy.