Making it in tough economic timesFor investors looking for an asset that actually benefits from adverse economic conditions and can eventually pay for itself, rental real estate provides these unique features and more to the owner.  Making rental real estate even more appealing as an investment is that it can be owned either directly buying a property or through providing the financing for the purchase of the transaction in the form of a private mortgage.

  While other asset prices and incomes were falling in value, the rents from properties over The Great Recession actually rose.

Historically, rents increase around 4-5%.(1)  Obviously, there are variances depending on a variety of factors, such as the location and condition of the property.(2)  But during The Great Recession while other assets declined, the amount of rent paid rose as the demands for these properties increased.  Fewer wanted to buy homes during The Great Recession, which increased the need for rental properties.  Based on the fundamental principles s of supply-and-demand, rents actually increased over that period as more were moving into these units.  During The Great Recession, there was the unique development in the real estate market of rents going up and the prices for properties going down. (3)

That is hardly a pleasant surprise for experienced investors in rental real estate.  Rents have always risen over time.  Investors can profit from this by either owning the rental property itself or financing the purchase of it through a private mortgage.  Due to the flexibility of a private mortgage, it can be customized to serve the needs and desires of both the lender and the borrower for the rental property.

According to Jerry Cohen, President of EquityBuild, a premier private mortgage investment  and real estate  investing firm, “There are two methods for getting started in private mortgages: Mortgage Pools and Direct Lending.  Mortgage pools are like the mutual funds of private mortgages. Each investor's money is pooled with the other investors participating in the pool and the money is used for private lending.

Cohen, who was just awarded the prestigious “Moving America Forward” honor for the success of EquityBuild and EquityBuild Finance, its financial arm, furthered that, “Direct lending is typically reserved for seasoned real estate professionals due to the level of expertise that is needed to identify undervalued properties...”   

There are many ways that the provider of a private mortgage can benefit from rents rising, either through a mortgage pool or direct lending as Cohen described.  As part of the financing, the lending individual or group issuing the private mortgage can base the amount of the payment on the total rent collected.  If the rent rises, so does the mortgage payment.  From doing that, the private mortgage lender can benefit along with the owner as rents move higher.  That is only fair as without the private mortgage, the owner of the property would not have been able to buy it and gain from the increasing rents.

Just as there are ways for the private mortgage provider to benefit from rising rents, there are ways to increase the profit from the increasing income.  By holding the rental property or the note in a retirement account such as a 401(k) or an individual retirement account, there are no taxes charged.  Due to assets in a retirement account being tax free, the net profit for the owner of the rental real estate or the holder of the private mortgage will profit even more.

As rents have proven to rise over time, eventually the property will pay for itself.  That is a very unique and desirable element of rental real estate that is difficult to find in any other asset.  While stocks do pay dividends, the average yield at present for a member of the Standard & Poor’s 500 Index is around 2%.  That pales in comparison to the returns from a rental real estate property that was chosen properly.  Moreover, dividends can be cut or omitted: that does not happen rents.

In addition to paying for itself, there are still many tax advantages to owning rental real estate.  If it is actively managed, these tax breaks and deductions are even greater.  The tax code still treats the owner of rental real estate very well, much better than other assets in many different ways.
A good example here is the 1031 Exchange.

Who's watching your real estate investmentsThis is when a property is sold and if another property like it is purchased, the capital gains are not taxed.  As an example, if an apartment building is sold for a profit, there are no capital gains taxes so long as another rental property is acquired.  This results from the transaction being considered an “exchange” and not a sale.  The Internal Revenue Service is very broad in its definition of like kind properties, making these transactions even more appealing to rental real estate owners.  There is nothing similar to this for the sale of a security such as a stock or bond, by contrast.  The 1031 Exchange is just one of the many ways that real estate is superior to other investments.

When you invest in rental estate as either the owner or the provider of the mortgage, you also have far greater control over the asset than with others.  All of the major decisions of a publicly traded company are set by the executive management.  For rental real estate or the private mortgage, it is the owner who makes the key decisions.  From that greater control comes greater profits, even during periods like The Great Recession.

That rents rose during The Great Recession demonstrates clearly the superiority of real estate that generates income in so many different ways.  It is rare to find another investment that actually pays for itself with the income from it increasing, no matter what the economic conditions.  The tax treatment of rental real estate makes the investment even more appealing, whether as an owner or lending through a private mortgage.  As it has throughout history, the rising rents from real estate provided its superiority as an investment, yet again.

by, Jonathan Yates: EquityBuild News Contributor

Sources:
(1) http://www.bargaineering.com/articles/ny-times-buy-rent-calculator.html
(2) http://www.scanph.org/files/IB-Bean-Housing.pdf
(3) http://www.usnews.com/news/blogs/home-front/2012/04/27/rents-rise-while-home-prices-fall