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Why Invest in the Housing Market? - Chapter 2

The Many Benefits of Real Estate Investment

Benefits of buying foreclosed houses

With so many different investment options available today, what is it that attracts so many investors and ordinary homebuyers to real estate, whether the real estate market is UP or DOWN? One of the primary reasons is that real estate investing is relatively easy to understand. Real estate investing, like any business that resells a durable good, is essentially in the business of buying low and selling high. The simplicity of this concept and the amount of wealth that can be created is what attracts so many individuals to realty. While buying low and selling high is the guiding principal to building real estate wealth, there are many other important benefits. Let's take a look at these benefits below, and kep in mind that investing in home foreclosures and other distressed real estate can actually multiply some of these benefits.

Price Appreciation: This is the most widely understood benefit of purchasing real estate. Price appreciation is generally the result of the basic principles of supply and demand. When the demand for housing increases faster than the supply of housing, home prices naturally increase. While housing prices regularly fluctuate from market to market there is one very interesting fact to remember. Since 1969, the first year the nation's average home sale prices were tracked by HUD, there has been a net increase in the nation's average sales price. As the US population continues to grow, combined with the inherent limitations on land development, housing prices as a whole should continue to rise. Buying cheap houses found in foreclosure listings can provide instant price appreciation in the form of purchased equity.

Tax Savings: If you purchase a home as a primary residence there are significant tax advantages. One of the biggest incentives to owning a home is that the interest you pay on your mortgage is tax-deductible, up to a very high limit. Additionally, you can claim property taxes you pay as an income tax deduction. Another major advantage of home ownership is that, in most cases, you don't have to pay taxes on any profit you make when you sell your home.

There are also tax benefits with purchasing investment property. The key tax benefit with investment property is called depreciation. The property can actually be appreciating in value while you are depreciating the asset on your tax return. The result is a reduction in your current taxable income while not reducing actual income.

Rental Income: Receiving positive cash flow from investment property is every entrepreneur's dream. To have positive cash flow, the rent derived from your tenants must cover all expenses including your mortgage, insurance and taxes. While there are any number of investments that may offer this benefit, few can produce as much income relative to the cash invested as real estate. By negotiating a great low purchase price on a bank foreclosure or a government repossessed homes, your ability to generate positive cash flow as a landlord is greatly enhanced.

Leverage: Simply stated, leverage is the use of borrowed funds to increase buying power. The most common example in real estate investing is a mortgage. Investors use a small percentage of cash as a down payment and finance the rest through a lender. As long as the interest rate at which they borrow is less than the rate of return on the investment, there is positive leverage.

Now that you understand the key benefits of purchasing real estate, let's turn our attention to the foreclosure housing market, which presents some of the greatest buying opportunities available.