First, let me begin by stating that investing in real estate is an alternative investment and the property itself is considered a hard asset. Further,the primary dynamic that makes real estate such a unique investment vehicle, is the law of scarcity which has a direct correlation with pricing, the supply, and the demand of real property in specific locations. Finally, some other microeconomics factors that cause real estate values to change are real estate lifecycles, in addition to the political and legal environment of a region.
Next, real estate provides many protections from inflation and provide passive income. Additionally, real estate is a depreciable asset, can be protected through a tax shield with proper use of leverage, and sold as investment securities through RE syndication and REITs. However, the disadvantages to real estate is that it is not a liquid asset. Therefore, when investors need to capture the equity of the property it is not quickly done through an outright sale. Instead, investors typically get loans against the equity to avoid the tax penalty from the sale of the property.
Although, some may choose to capture equity through another loan, this is dependent on the strategy of the investor. In some cases, if the mortgage is an interest only, and the investor has a 10-year time horizon to capitalize on the property and given money back to investors, then they may choose to refinance a loan to pay off the original debts and investors, retain the equity remaining and use it to lever against another investment property. Finally, in the event the property is sold, then the best position is to have it protected by a 1031 and buy another like-kind property to avoid any tax penalty on the sale. As a result, an investor will purchase a bigger property that makes more cash flows, and are taxed against the investor's passive income versus the overall sale.
Mark Lester has over 5- years of experience in the real estate industry and is an active employing broker in the state of Colorado that specializes with investment and business real property sales. Prior to a career in real estate, Mark worked over 10-years in the restaurant industry. Recently, he has consulted business owners and real estate investors with helping them solve issues ranging from marketing, operational, financial, or portfolio strategies. Finally, educationally, the author holds a BA in real estate from Ashford University, in addition to an MS in finance and economics, and MBA from West Texas A&M University.