“I would say that single family homes are cheap now. If I had a way of buying a couple hundred thousand single family homes… I would load up on them, and I would take mortgages out at very, very low rates. So it’s a very attractive asset class now.” ~ Warren Buffett
Warren Buffett made this statement on CNBC February 27, 2012. I agree with Warren Buffett that single-family homes are an outstanding asset class for investors. I like single-family home investing a lot better than gold, stocks, bonds, or mutual funds. Here are six reasons single-family homes make great investments.
1. Leverage – Maximize Your Return on Investment
Learning to use other people’s money for your investment will allow you to leverage your single-family homes 100%, which provides an infinite return on investment. Instead of investing your cash and using your credit, you can learn to buy single-family homes and invest your knowledge into your deals.
Even if you decide to finance with a bank, you’ll likely be making a 20% down payment on your single-family home. If you buy a single-family home for $100,000, you’ll need a $20,000 down payment as your investment, but the cash flow you create will be a strong return on that $20,000 investment.
2. Growth – Equity, Amortization, and Appreciation
All investments are expected to grow. There are a number of ways that single-family homes will grow your investment.
Buffett is right that houses are still cheap. On top of the overall pricing being attractive, real estate investors know how to buy houses on sale in every market. A $100,000 house can be bought for $70,000, which creates $30,000 of equity upon purchase.
Additionally, if you finance your purchase with a bank, you will enjoy amortization that comes with principle pay-down, so you owe less on your investment each year.
Buffett highlights the low interest rates in his reasoning for investing in single-family homes and he’s right, as interest rates remain very cheap. In 2013 the real estate market began to show price upticks in a number of cities. No one knows how this will continue in the years to come. I add it as an additional potential investment advantage. Real estate tends to be hyper-local, so every market and every sub-market is different.
3. Tax Benefits
As you begin investing in real estate and holding onto your investment, you realize there are a lot of great tax advantages that accompany your investments. For example, rental income is considered to be passive income and not subject to self-employment tax.
Depreciation allows the investor 27.5 years of deductions on your property and the equipment that makes them habitable (heat pumps, appliances, etc.). Mortgage interest is typically the investor’s single biggest annual expense, but the good news is … it is deductible. Other expenses that can provide tax benefits can include mileage, home office, repairs, etc.
4. Cash Flow
Cash flow is my personal favorite reason for investing in single-family homes. Investing in hard assets that produce income is a huge benefit of buying and holding single-family homes. Your tenants pay your mortgages and your cash left over after all your expenses is your net cash flow.
Imagine making $300 per month in net cash flow and not having to work much to produce it. If you invest in 15 houses, you could create $4,500 of monthly cash flow while enjoying all the other benefits of single-family homes.
5. Multiple Exit Strategies
A number of exit strategies can produce great results. You can be a landlord and enjoy rental income; you can use lease options as your exit strategy; you can sell with seller financing and enjoy income from your note, or you can sell the house outright to a new buyer (flip it).
If you seek to create cash flow and equity from selling with seller financing, please be sure to carefully study the new Dodd-Frank bill as it now regulates seller financing.
6. Invest Locally
Every time you buy a single family home you are investing in your local main street instead of Wall Street. You are improving your local city and neighborhoods one house at a time and providing housing solutions for the people in your local market. It’s rewarding working locally and helping to improve our local markets and a huge side benefit of investing in single-family homes.
Jim Ingersoll is a real estate entrepreneur who has bought and sold hundreds of homes. He is the author of Investing Now and Cash Flow Now (both available at Amazon.com), and enjoys speaking and coaching others on how to obtain their financial freedom. Jim is Head Real Estate Coach and Trainer at: Coaching.CREonline.com This article is reprinted here with permission from Creative Real Estate Online at http://www.creonline.com.