Warren Hickernell
Realtor-GRI
"Top Producer"
Prudential Palms Realty

Warren@RealEstateInSarasota.com

(941) 232-5738

Real Estate continues to be one of the best investments for several reasons. One of the best reasons, especially in our Sarasota market, is the strong appreciation rate we have been experiencing for several years. This is especially pronounced for waterfront homes and property on the Keys.

These appreciation rates are well into the double digits, both for single family homes and condominiums. Because of the limited supply of waterfront and Key (island) properties and the unlimited demand, prices continue to soar. And the demand appears to be increasing as more and more baby-boomers contemplate retirement, the purchase of a second vacation home or simply investing in real estate to balance out their portfolio. Whatever the reason, demand continues to push up prices for all waterfront and Key properties.

Cash flow from rental income provides the investor the means to have the property pay for its costs during ownership. The monthly checks from the tenants will help pay for the taxes, insurance, maintenance and mortgage on the investment property. If purchased properly and depending on the location, it is even possible to have positive cash flow from your investment property. However, on the waterfront and the Keys, this is highly unusual because of the higher prices and strong appreciation.

Tax Benefits are another great benefit which must be figured into the overall rate of return on your investment in real estate. The Federal Government allows investors to generate a “paper” write-off of the building purchased and being rented over a 27.5 year period on residential property. Usually, this “depreciation” write-off can help lower your over-all taxable income. And don’t forget that all the interest on the monthly mortgage payment is also a tax deduction. I find that normally my interest deduction offsets my rental income, allowing the depreciation to off-set some of my other earned income.

Principal paydown on the mortgage is the final factor I use in computing my overall rate of return on an investment. Consider the fact that the tenants are making the mortgage payment for you. And that over several years, the amount of your mortgage payment starts to change from almost all interest to less interest and more principal. As years pass, you will reach a point in your mortgage when you will have a larger principal portion than interest. Although this usually doesn’t happen until late in the life of the loan, we still enjoy some portion of principal paydown on the mortgage, even in year one. I find this a great method of “forced” savings, building equity automatically.

It is very difficult to find investment property that can produce positive cash flow with only 20% down. However, tenants pay most of the expenses while you enjoy the tax write-off, mortgage paydown and strong appreciation.