Posted 6 months ago

Why Invest in Real Estate? Here's 5 Reasons

There's an old saying in investing that you make money when you buy, not when you sell. When done the right way, real estate investing can provide great returns through rental income, tax advantages and the capital appreciation gained from buying below the market value.

I have to be honest, investing in real estate is not for everyone. It takes time to learn to invest in real estate. You have to have patience and be willing to work to find money making deals. And it takes financial discipline to save up enough money to get started. Again, I'll be honest, investing in real estate is not something I can teach someone who doesn't have control over their own personal finances. How can they help anyone else?

Still, I have found that real estate is a much better way to invest my money than the stock market. I am able to make a much higher return on my real estate investments than on my traditional stock portfolio. And real estate offers some unique qualities that make it attractive.

Here are my five key reasons real estate investing is better than the stock market:

1. Real estate investments provide cash flow and can be a hedge against inflation.

Rental properties can provide a steady source of income. Buying the right properties is key, of course.

What’s nice about rental income is that your cash flow keeps pace with inflation. The market price for rental properties can also appreciate as the cost of living increases.

Buying a distressed property below the market value is another strategy available to you in real estate. Then you can rehab the property and sell it a few months later for market value and pocket the profits.

Whether you choose to rehab for a faster potential profit or hold and rent for monthly cash flow, investment properties can provide cash and a hedge against inflation.

2. Real estate is a market where you can buy low and sell high.

You can’t possibly know enough about an individual company, its sector, management, competitors, to consistently make money in the stock market. And institutional buyers will always have more leverage and know more than you as an individual investor.

On the other hand, with residential real estate you are dealing with individual properties and each one is different in location, size, features and other criteria. There is no set market for the exact property you are considering.

In the stock market, market inefficiencies are quickly adjusted for by other investors. In the real estate market, there are distressed properties and distressed sellers that create market inefficiencies. You can always find deals and buy low.

3. Real estate provides better returns and lower risk than stock market investing.

We all know stock market values go up and down. Average investors are just not very good at capturing the market return of a simple balanced portfolio. Never mind outperforming it.

Individual investors tend to buy and sell at precisely the wrong times. That wipes out possible gains in an already efficient market where bargains are sparse.

On the other hand, real estate is nearly immune to emotional buying and selling. Real estate is not a liquid investment, panic selling is impossible. You have more facts to make a better investment choice initially when you buy properties.

And the long-term nature of real estate assets ensures that you hold on through ups and downs. All the while, rents and property prices rise due to inflation.

In general, your risk of loss goes down the longer you hold real estate investments. Your equity builds and home prices rise over time. The stock market on the other hand, risk typically stays the same over time.

4. Real estate investing provides unique tax advantages.

Depreciation is a tax advantage that most investors have heard about. For residential real estate, the IRS allows you to deduct the cost of the property over 27.5 years.

What real estate investors love is that you are depreciating an asset that is often appreciating. That means you get a tax credit on the cost of an asset that may be going up in value!

Depreciation is a tax credit on top of property maintenance and other property related costs that you can deduct from the rental income you get and lower your tax liability. That means more money in your pocket.

5. Real estate investors can use leverage to build wealth.

Leverage is a tool that many real estate investors use to build their portfolio of income-producing properties. Getting a mortgage to buy a rental property gives you leverage that you can use to invest in more properties (and different types of properties to spread your risk) with less money down.

Say you put 20% down on a $100,000 property. You are controlling an income-producing asset worth five times your cash investment. You are earning rent from a $100,000 property when all you invested was $20,000.

Well-selected rental properties will be cash flow positive. That means that your annual rental income will pay all the costs (mortgage, taxes, insurance, maintenance, management fees, etc.). It will also give additional cash for your bank account.

There are pitfalls to leverage and it can be easy to get in over your head. You need to critically evaluate your strategy, the specific deal, and the terms of your loan. Being over leveraged greatly increases your risk. Leverage is a tool that needs to be managed and monitored.

Closing

I have found that real estate provides many advantages over the stock market. You can make returns in excess of 10% on the cash you invest from rental income. Your investment provides monthly cash flow, and residential properties typically provide capital appreciation.

With real estate, you have much more control over the underlying asset. That means doing your homework means you can find many opportunities to buy low and sell high.

The tax advantages of rentals can save you thousands of dollars each year, thanks to depreciation. When you get a mortgage on an investment property, the rental income pays down the loan every month, building your equity in the property.

I do want to stress that you can’t just go out and buy any property. As a real estate investor, it’s crucial that you buy below market value. You really do make money when you buy in real estate. That means you need to put in the time and effort to find deals and be complete in your research.

I pass on many more deals than I invest in. Most offers I make are turned down by the seller. So should yours. If your first offer is accepted, you might be paying too much! Sellers are often emotional so it is important that you remain analytical.

Offers below the asking price will often be turned down. That is just a reality of real estate investing. I have purchased less than 1% of the properties I have looked at in the last 15 years. But by doing my research and buying below market values, my real estate investments stand a very good chance of outperforming any of my stock investments.

Diversification is the key to the long term performance of any portfolio. Diversify your real estate portfolio and have your assets diversified among asset classes including stocks, bonds and real estate.



Comments