I talk to a lot of Nomads as well as real estate agents and lenders that work with Nomads. Most of the people I talk to believe real estate is an awesome investment–and it is. Some talk about how great it is that you can cash flow or that property appreciates. Few people remember the easy little trick for recalling the 5 primary benefit areas of rental real estate. Here’s the trick.
Real estate is often called the IDEAL investment because IDEAL can be an acronym describing the benefits of buying investment real estate (like we do with Nomad).
The I in IDEAL stands for the income produced by owning rental properties.
This is your cash flow that is produced when you buy a property where the rent (and other income generated from the property) exceeds your expenses on the property including your debt payment, taxes, insurance, vacancy, maintenance, etc.
The D in IDEAL stands for depreciation or the tax benefits you get from owning investment real estate.
The IRS allows us to depreciate the value of the home (not the land) on our residential real estate over 27.5 years. This often allows us to take properties that have break-even cash flow and, when we consider the tax benefits of the investment, actually have positive cash flow.
The E in IDEAL stands for equity buildup you get from paying down the amount you owe on the mortgage.
If you get the recommended 30 year amortizing loan that we recommend when buying Nomad properties, you will be paying down the amount that you owe on the loan with each monthly payment. Over time, you owe less and the less on the property until finally the entire property is paid off.
The A in IDEAL stands for appreciation which is the tendency for property value to increase over time.
In my opinion, appreciation is largely just inflation. Things tend to get more expensive over time as labor and materials increase in cost. So, as you hold real estate, the cost to reproduce or replace that property tends to go up. Of course, it is possible that property values could decline as well, but over long periods of time real estate values tend to increase.
The L in IDEAL stands for leverage which is your ability to control a large asset with a relatively small amount of money.
If you were going to forgo Nomad (shudder at the thought) and put 20% down to acquire rental properties you are able to control a large rental property asset with just 1/5 of the value of it. For example, you could contract a $300,000 property with a $60,000 investment. If property values go up, you get the benefit of the increase but only had to put up a fraction of the value of the asset. This amplifies your return. If the property values go down, you get the loss too and losses tend also to be amplified with leveraged investments as well. With Nomad, since we are often putting less than 20% down (we normally recommend 5% in most cases), you are using even more leverage and that is why our Return On Investment tends to be higher with Nomad in our modeling.
I'm not sure if he came up with it, but my friend and fellow real estate investor Brian says…
Without leverage, real estate is just a great “IDEA”.