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Why Is Real Estate a Good Investment for Homeowners?

Featuring Guest Author: Rick Geary, Loan Officer

Is real estate a good investment?

How to Invest in Real Estate

Are you looking for an extra source of income? Another way to build wealth for future plans? Whatever your goal may be, investing has proven to be an effective way of generating a stable return on your hard-earned cash.

Investments come in different shapes and sizes. When most people hear the word “investing”, a common thought they first have is investing in the stock market, bonds, or even cryptocurrency. Though there have been several success stories around these types of investments, this blog will cover a type of investment many people seem to neglect, yet it can reap valuable rewards.

Investing in real estate is different from investing in the stock market, though both can build long-term wealth. We can’t guarantee if either one will make you money, but long-term real estate investments are considered by many to be a more stable source of income with lower risk overall. When you start to hear housing inventory is in demand, and yet interest rates remain low, you might want to think about investing in real estate. So what should you know about purchasing an investment property?

Investment Property vs. Other Property Types

Assuming you’re not purchasing an investment property using all cash, you would follow the same application process for a mortgage just as you would with a primary residence. You must notify your chosen mortgage lender of the intended use of the property you are purchasing. The reason being is there are various qualification policies, down payment requirements, and rates for each use type.

As you may know, a primary residence is a property used when buying a home you will inhabit. Simply put, it is a property you plan to live in and what most people would consider their main home.

Another use of property is as a second home, aka, a vacation home. Unlike your primary residence, a second home is a property you visit a few times a year and is not considered your daily or main home.

Last is our highlight of this blog, use an investment property. An investment property is not one you live in or visit for vacation, as its sole purpose is to generate income. When you purchase an investment property, it can serve several purposes, such as someone else’s primary or vacation rental, as a commercial property, or for ‘flipping’ – to produce a profit in the near term. Regardless of how the property is utilized, the main point is you have no intention to occupy the property yourself.

How to Invest in Real Estate

Reasons to Invest in Real Estate

Now you may have heard alarming stories about investing in general. Investing in anything should never be taken lightly, especially since the risk can be as much as the reward. Nonetheless, investing in real estate seems to be a more stable option out of all the investing types. What makes it so valuable?

1. Wealth creation

Investing in real estate is a great gateway into generating extra income for long-term wealth. Not only are you creating another source of income for yourself and your future, but your equity will gradually increase over time and add to your overall net worth. If you stick with just one investment property, or choose to build a portfolio of several, investors often gain a sense of security knowing these properties are paying back the money spent for them, plus more. Once you buy a property, it is yours to keep. The longer you own it, the more money can go into your pocket each month, and year.

2. Tax advantages

Diversifying your portfolio by investing in real estate is already a useful advantage in improving your overall finances. When tax time comes around, your real estate investment can benefit you in multiple ways. Some of these benefits include tax deductions on your mortgage interest costs, deductions for long-term depreciation, and the potential for long-term capital gains. Check with your tax advisor.

3. Helping people

When investing in a property, think about the total impact housing has on lives, neighborhoods, and the economy as a whole. It all starts with a foundation. You are providing this foundation when you buy a home. In turn, if you buy an investment property, you are providing a foundation for another person or family. Maybe they have not yet been able to save enough to buy their own home, or perhaps they need a great place to live for a brief period as part of their planned path in life. Remember, you can be helping to create a positive impact! This is one of the great, and non-taxable, extra benefits.

Real Estate Investment Tips

Tips on How to Get Started

If you’re starting to warm up to the idea of real estate investing, try not to get started too quickly. To help you prepare for your journey, here are some successful tips to keep in mind.

Start early

Like any winning team, the key is pre-planning. Choose a lending professional with experience. A true lending pro will advocate for you, guide you, listen to your goals, and know how to avoid potential speed bumps and potholes of the purchase process. It is best if your lender is both a banker and a broker, like RWM Home Loans. This helps ensure you have access to a wide variety of competing lending sources and allows your loan officer to search dozens of lending sources for you, putting you in a great position.

Build your credit

Another effective tip is building your credit. A strong credit history provides the most opportunities for the best financing terms. Great credit takes time, so the sooner one starts building credit, the better. Time plays a huge role in the algorithms used in credit scores – because time cannot be created or altered. We encourage you to reach out to us for any credit questions or even a review of your credit history very early in the process. Should something in error need to be corrected or updated to help your scores increase, time is the best ally to achieve this. It is much less stressful to do this work before you begin shopping for homes or before the pressure of an escrow timeline begins.

Maintain a consistent income

The “day job” is king here. A high base salary with a history in the same role opens the most doors. Retirement income from pensions and social security is next best. If your current career is consistent and will continue for at least three years, you’re probably in good shape. For those who are commissioned or self-employed, reach out to a loan professional early in the journey so they can best advise you on the pros and cons of your application contents, and the backup documents you’ll need to build a strong and well-documented application package. Addressing any inconsistencies, or items falling into a ‘grey area’ is best done upfront. Your experienced loan officer can advise you about what supporting documents or explanations can often help meet the most current guidelines.

Grow your savings

Cut out a restaurant meal or two, make your coffee at home, and for a while, cut down your travel and recreation expenses – at least while saving that down payment. But remember, you do NOT need to save up 20% for a down payment these days! When buying a primary residence, you can make as little as a 3% down payment in many markets, and for eligible veterans and active military, putting 0% down is common. Ask us for more details, and we can prepare a customized Loan Clarity Analysis for you. This is a “living” budgeting and planning tool we review with you to help you dial in your final plans. It will illustrate “closing costs” (i.e., the one-time expenses of getting a home loan and/or buying the house) as well as the “pre-paid” items (the pro-rated, ongoing expenses of a home), to help you plan the cash you’ll need to have in the bank to close successfully on your property.

Real Estate Investment Strategies

Investment Strategies

Real estate investment can be for the long or short-term.  You can own your home as an individual, or as a family, or as a group. It all depends upon your goals. Just like a map used for getting to your destination, once you know the goal for owning property, the route to get there becomes increasingly clear.

As mentioned, buying a home can have the benefits of a mortgage interest tax deduction, as well as some favorable tax help when you sell the property later should values have increased. Buying a rental property or vacation home has different advantages, and it has the potential for deferring capital gains taxes for any properties which go up in value as you hold them. Best to consult with your tax advisor on this since they know your full situation best. On that note, if you need a referral to a great tax professional, Rick Geary and his team have a few of them – just ask!

Another potential strategy as you build your real estate portfolio is to consider upgrading to multi-family units. For a little more money spent, you can spread your risk of tenant vacancies and build even more cash flow and real wealth over time. This path is ideal for the risk-reward ratios.

How Real Estate Investing Turned Into Retirement Income

My belief in the power of real estate investing comes from nearly 50 years of hands-on experience. At an early age, I watched my father work full-time, along with a part-time job on occasion. The extra money he earned and saved was frequently put toward buying houses.

In Orange County, California, for example, the county was growing fast in the 1960s, 1970s and even into the 1980s.  When dad bought a home every few years we would move, and rent out the last house. Together, we would improve the new property over time, then move to a new home. The tenants eventually mailed in enough rent checks to pay off my dad’s properties, leaving him with five free-and-clear homes when he retired. The result? Almost $8,000 each month in retirement income!

Watching my father work early to buy real estate taught me how real estate could eventually work for my father. It illustrated first-hand how powerful investing in real estate can be. The extra efforts he put into it over 30 years allowed my father to retire with more than twice the monthly income had he relied on his pension and social security alone. And he held those assets long-term, which only increased in value over time, growing his net worth. A double win in wealth creation.

Real Estate Investment Success

Ready to Invest?

Rick’s story about his father is a prime example of why creating a strong foundation can lead to building wealth over time. It is not usually a quick process, but with consistency and hard work, it can pay off very well.

Real estate investing takes effort and preparation to execute well. If you are unsure this is something that aligns with your intentions, feel free to reach out to us for professional advice, for referrals to a tax or real estate professional, or to ask any questions about the process!

As a community mortgage banker, we strive to work closely with you to help you accomplish your financial and home loan goals. Whether it’s to build wealth, grow your portfolio, or create a future for you or your family, we are here to help.

If you’re looking to buy a property out-of-state, follow our beginner’s guide to prepare for your big move. RWM Home Loans can help you move or invest in multiple states!

About the Guest Author

Rick Geary

With over 20 years in the mortgage industry, always putting the consumer first, Rick specializes in residential property loans up to $6,000,000, for 1 to 4 unit properties used as homes, vacation homes, and rental purposes. Also on his team are Reverse Mortgages and commercial loan experts to help save you time and deliver great results. He has successfully funded well over $1 Billion of home loans in over 3,000 transactions, giving him the experience to help you get a low rate and save you hassles and headaches. Accountability. Integrity. Experience. If you are looking at buying a home, whether it’s in Orange County or anywhere else up and down the state of California, Rick’s team is here to help. Learn more.

Financing details are for educational purposes only. All views and opinions do not constitute financial or legal advice and reflect requirements at the time of publication. Rates, program terms, fees, and conditions referenced are subject to change without notice. Not all products are available in all states for all amounts. All mortgage applications are subject to underwriting guidelines and approval. This is not an offer of credit or a commitment to lend. Residential Wholesale Mortgage, Inc. dba RWM Home Loans is an equal housing lender licensed by the CA Department of Real Estate #01174642 and CA Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act. NMLS# 79445

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