Real estate and home inspection

Income-producing real estate: value in every form

By: Neta Doron

There is endless debate about real estate as a worthwhile investment. What is clear is that once you own a first property, a second one is supposed to generate income for you.

Before any purchase, get advice from a home inspection (bedek bayit) on the apartment: a building inspection like this confirms that the property is worth its price and that it hides no construction defects that could reduce its value. Any property being bought as an asset should go through one.

That income does not have to come from a private home: it applies to any real estate purchase. A commercial property can be just as income-producing, whether it is a shopping center, a storage room, or an apartment.

What matters is knowing you have a range of options. And buying a property is not a lifetime commitment: in the worst case, you can part with it, ideally with as little loss as possible, and doing a home inspection before the purchase heads off unpleasant surprises.

Tax benefits for property owners

One iron rule of investing in income-producing real estate: never buy on the strength of tax benefits alone. If a property is not worthwhile in itself and does not generate income without those benefits, it is a bad deal.

Treat tax benefits as a bonus, the cherry on top, not as the basis for the investment. That is also the reason to prefer a profit-generating property over raw land as an investment: bare land carries few tax benefits and generates little income on its own.

Many investors pin their hopes on an investment, much like in dating, and expect a return when they eventually sell. The trouble is that some properties simply never produce a yield, and are not worth the time or effort.

Added value

What adds value to a property? Better management, physical improvement, or an injection of cash. Each acts as a catalyst that lifts the property, and its income, further. It works the same way as studying for an exam: a student who prepares for the psychometric test improves the odds of a high score and, with it, admission to a good program. The logic in real estate is no different.

Investors who deal fairly with tenants, offer workable financing terms, and put money to good use improving the property tend to do best. Combine that with smart use of tax benefits and an investor maximizes the property's value and its return.

Real estate helps many investors reach different goals: cash income from the property, protecting value against inflation, or even creating work through maintaining and managing it. Along the way, there is always room for further profit and another sound real estate investment.

The appeal of real estate

So what makes real estate investment so appealing? Largely, control over income, in the same way a salary and its tax do.

Take an apartment building that produces monthly rental income as an example. The owner uses that money to cover ongoing costs (taxes, repairs, services, building insurance). After mortgage payments, interest and other costs, the owner is left, hopefully, with a positive cash flow as the return on the investment.

There is also a cash tax deduction for depreciation of the building, based on an accountant's assessment of its wear, which requires no matching cash outlay to qualify. Investors commonly offset tax results between properties, a useful way to cancel out drops in value and balance the properties in a portfolio.

In summary, income-producing real estate can certainly be a smart investment, but not every property fits and not every purchase will justify the hoped-for profit. It is worth bringing in experts to check the property before buying it: a home inspection to find construction defects, and a valuation from a real estate appraiser.

That means understanding exactly what you are getting into, what returns to expect, and running thorough checks before committing. Even in a booming market, the same rule applies: get help from an appraiser and a home inspection engineer, because amateurs who skip the feasibility check tend to get hurt, badly.