By Dale Carlton, CRS
In the RRC course Increase Wealth with Rentals and Other Investment Properties, we walk through all the necessary steps to understand residential real estate as an investment, not only for clients but for real estate agents themselves. This knowledge will be invaluable when they consider investing in real estate for their own retirement or ensuring financial security, even in a changing economy.
In addition to being a real estate agent, I am a professor in the finance department of the University of Arkansas, and one thing I can tell you is that most of our finance professors who do not have experience in real estate do not immediately think about real estate as a part of an investment portfolio. Therefore, it generally is real estate agents—and specifically CRSs, who’ve been in the business for many years—who can guide an investor and help them understand the value that might come from investing in real estate, the tax benefits that may accrue and what they could expect as a return on that investment.
One useful tool I offer in the course is understanding how to use annual property operating data, or APOD, which helps determine before-tax cash flow. Then we go over a couple of returns, like an equity buildup and a cash-on-cash return, which are investment analysis returns that some investors can study to determine whether a property is a good investment or not.
It is often true that one learns best by doing, so we encourage the people taking this course to invest themselves to get a firmer grasp on the ins and outs of property investing. Buy an investment property, learn how it works and know how to do it before you bring on an outside investor. Not everybody can do that; sometimes an opportunity to help investors comes first. But we encourage it because it becomes personal when you do it yourself.
An IDEAL investment
During the course, we will highlight another acronym that provides a handy way to talk about the benefits of real estate investment: IDEAL.
I is for income. One hopes for positive income before taxes, and then after tax, you might gain even more because of tax advantages.
D is for depreciation. We get to depreciate the improvements to the property, which saves on taxes.
E is about equity buildup. You can borrow money to invest in real estate, unlike stocks and other instruments (they might have a capital call, or you might be required to have a certain amount of cash available to borrow money to buy certain portfolio items). But with real estate, it’s easy to borrow money because there’s an asset to borrow against.
A is the appreciation. The typical appreciation in real estate over a 30-year period is around 6.2%. In some years, a property’s value might increase by over 10% and 2% to 3% in others. But we haven’t had negative appreciation in a very long time.
L stands for leverage, the fact that you can borrow, essentially using other people’s money to invest. So, if you only have a small amount of money to invest, you can borrow the remaining amount to invest in real estate, pay it off slowly and get the equity build-up.
Another valuable aspect of this course will be learning how to tailor your marketing specifically for investors. As an agent, you can’t buy every investment you find, even if you know it’s a good deal. So, where can you go with this information? Your clients may only be buying a home to live in every seven to 12 years, but every person is a potential real estate investor if you can effectively teach them the principles of investment.
Explore Dale Carlton’s full course catalog at www.CRS.com/education/faculty.
