Tired of playing the stock market?  Did you loose your shirt on the dot com bust?  Maybe it’s time to consider investing your money in real estate.  Real Estate investing isn’t for everyone.  However there are four major reasons why you should consider it.

1. Cash flow: Yes, depending on the type of investment you make, it is possible to have a cash flow return. In other words after you’ve covered your property’s mortgage, property management fees, repair, and other expenses, there might still be some money left over for you to put in your pocket. When evaluating a property for purchase, evaluating the potential cash flow should be a top consideration- if for no other reason banks don’t like to lend money on properties that are going to loose money.

2. Appreciation: This is the money you “earn” over time as a property’s value increases.  A general rule of thumb is you can assume a 4% appreciation level on real estate. Of course, some years are better than others depending upon the economy and local economic factors.  Location also plays a big part of this as areas with a heavy demand may see double digit appreciation and other areas might fail to appreciate all together.  For example, the average single family home sold for $23,400 in 1970; in 2000, a similar average home sold for $169,000. That’s approximately an 8% annual increase.

3. Equity: As you pay your monthly mortgage payment, over time you reduce your mortgage and build up your ownership in the property.  The difference between the sale price of the property and the remaining mortgage you still owe is called equity.  Like appreciation, equity is a long term approach to saving money.  It’s made even sweeter when rental funds cover the cost of your mortgage payment.

4. Tax savings: Although you should consult your tax specialist before buying investment property, you will probably be eligible to depreciate your investment properties when filing annual tax returns. Residential properties depreciate over 27.5 years and commercial over 39 years.  Be warned, however, when you sell your property, you will be facing capital gains taxes (generally 20%) unless you reinvest the money properly.

The next thing to consider is, what type of investment property do you want to get into?  There is commercial- office buildings, strip malls, and small shops.  Managing these takes a much higher skill set as you have to recruit corporate tenants which don’t respond to simple ads in the newspaper.  On the plus side, you generally talk in terms of 5-20 year rental contracts.  You also have residential investment properties.  This can run from multi-unit apartment complexes to single family homes.

You also need to determine if you are looking for long term investments- such as an apartment building that generates rent year after year- or a short term investment- such as an older home that can be gut rehabbed and then resold within a few months.  The approach you take in buying investment properties will vary depending on what you want to buy and how long you plan to keep it.

A nice feature of real estate is that regardless of the size of your real estate investment, you can make a return and provide yourself with a nice little nest egg.  However, picking an investment that you are comfortable with and you think you can make money on is much more important than buying the first thing that comes along.  If you are a first time investor, you should ONLY consider working with a Real Estate Agent that specializes in Investment Properties or has experience in owning or managing investment properties.  Far too often, Residential Real Estate Agents are distracted by a property’s kitchen or proximity to a school- the things a home buyer would consider important- instead of being concerned with calculating out a cash flow statement.

Interesting Statistic: According to the U.S. Census Bureau, 75% of multifamily investors are over the age of 45. Over half of these (51.6%) own less than five units, and they earned approximately 31% of their income from ownership of rental properties