Purchasing investment property is a strategic way to build generational wealth, hedge inflation, and control a retirement asset. When making the decision to buy investment property, you must first look at the financial considerations. These relate to the costs of owning real estate, managing the asset, and understand the potential wealth that can be created. The first things you should consider are:
Do I feel comfortable spending the money it takes to buy investment property? The costs of owning real estate includes:
- Your down payment plus all the costs and fees associated with purchasing real estate.
- Your loan payments, your taxes and your insurance.
- The expenses associated with maintaining your property. This would include everything from gardening to painting the property to replacing the roof.
- Can I see my business using this real estate for at least ten years? If not, could I see myself otherwise owning this property for a long time?
- One must consider the other business uses for the funds spent on purchasing commercial real estate. Commercial real estate is usually purchased by businesses that do not feel that they need those funds to grow their business.
If you can afford the property without stretching outside your comfort zone and can see yourself owning the property for an extended period, the odds are that this will be a successful investment.
THERE ARE MANY BENEFITS THAT CAN COME FROM OWNING INVESTMENT PROPERTY. THE FIVE MAIN REASONS ARE AS FOLLOWS:
Consider buying the building or commercial condominium that houses your business. When a business owns the place it operates out of, the threat of being forced to move is virtually eliminated. Also, when you own your own building it makes sense to spend money on improvements knowing that the benefit is going to you and not your landlord. Also consider the cost of moving and how important is a specific location important to your business. If the cost of moving is high or the location of the business is important to your success I would advise you to be more aggressive in purchasing the property that your business occupies.
OPPORTUNITY FOR APPRECIATION
Let’s be clear “appreciation is not guaranteed”. However, for the vast majority of properties that are well maintained and are in areas of increasing economic activity there is potential for significant appreciation over time. A property that appreciates at the rate of 5% will increase in value by 85% over twelve years. In San Francisco, these numbers have grown exponentially. Now try calculating the return on investment, using just the initial down payment! Also, the cost of renting real estate has been known to go up at a rate that roughly tracks the cost of real estate. Often your total monthly payments and costs of owning your own building could be less than the cost of renting the same property within ten years. Tax shelters for investment property should be discussed with a qualified tax adviser.
YOU CONTROL THE ASSET
For business owners occupying their property, one of the major complaints that I have heard from businesses is that they build a successful company at a suitable location only to see a significant rent increase at the end of their lease. I have also seen many businesses forced to close due to rent increases. A large rent increase can be particularly devastating to companies that have put a significant amount of tenant improvements into the property or feel the need to stay at or near their location for other reasons. Remember the tighter the real estate market the larger the potential rent increase.
For apartment building owners, long term investments have returned high gains and can be used in a myriad of ways. We see property investors buying buildings for their children to live in once in college or beginning their careers. Haven’t we all said to ourselves, wow, if I only bought that building when I could of, years ago?
REAL ESTATE IS ONE OF THE FEW ASSETS THAT YOU CAN USE TO GET A LOAN
At least at a reasonable rate. The hardest time to get a loan is when you need the money. Having real estate to pledge as collateral might be the difference between getting a loan and not getting one.
Most of us will retire one day. The rent that you collect from your property can make your retirement more comfortable.