5 Reasons Why Real Estate is the Most Popular Alternative Investment

Even if you’re new to self-directed investing, you are most likely familiar with the real estate market. From realtors, to rental property owners, contractors, flippers, and even property managers, the list of those employed by and exposed to the real estate industry stretches on. It might not come as a surprise to hear that many investors utilize self-directed IRAs to invest in real estate assets.

As I have mentioned in previous posts, I have been immersed in the world of real estate since I was a child. My grandfathers on both sides were involved in real estate, as were both of my parents. My brothers, sisters and I have been involved in buy and hold deals, as well as selling and flipping properties. This passion has since been passed down to our kids. It’s become a family affair in which everyone has been able to utilize their own knowledge and expertise to maximize their wealth.

But even if your family tree’s roots are not as firmly planted in real estate, it’s a lucrative investment to keep in mind. Why is it so popular? What are the biggest benefits to you as an investor?

5 Benefits of Investing in Real Estate

1. Real estate is stable (and hard to steal).

Despite the stock market’s occasional dips and crashes, real estate’s appreciation will always keep up with inflation. Unlike a computer, which can have a life expectancy of two or three years, the overall value of real estate is always increasing. This diverse asset props up your portfolio, even when your finances suffer the blows of major crashes. Despite the devastating subprime mortgage crisis, the market has recovered. In fact, from 2000 to 2010, private commercial real estate averaged an 8.4% return.

The values of my own properties were affected during this time frame. In 2006, property values were up almost 80% (for example, if I bought a property at $500,000, it was worth $900,000), and property taxes went up because values went up. After 2008, property taxes went down because the values went down. I saw some of my properties in Florida go up and down in value a lot more than my properties in Pennsylvania. My properties in Texas also saw some good appreciation and depreciation. North Carolina saw a lot of depreciation in 2008; my properties cut 40% of their top value. But as a buy and hold person, maintaining these values didn’t hurt as much. Because I was renting those properties, the rents didn’t fluctuate. In fact, cash flow remained constant until tenants lost jobs or contracts and moved out. The only times I was hurt physically and monetarily during that time frame occurred when people had to downsize their property.

Real estate allows you to invest in a tangible asset that will remain stable, even when times become unstable. What often gives me peace of mind as an investor is knowing that a property or building is very hard to pick up and walk away with. Cars can get repossessed and your wallet containing your cash can get stolen, but not a building!

2. You can build wealth through self-directed investing.

Unlike traditional investments that sit in your brokerage accounts, waiting to accumulate interest, a real estate investment lets your money work for you. This is beneficial for investors who are particularly interested in fast, compounding gains, which can be done in your IRA. You can purchase a rental property in your IRA, and have the monthly rental income from your commercial or residential renters flow back into your IRA. Then, when you sell that property down the line, the profit from that sale can also flow into your IRA.

Even though real estate is an active investment, you are generating passive income without social security or medicare taxes, which is often not the case when it comes to your earned income and salary.

Tax advantages and compound interest are also great incentives to get into real estate investing through your IRA. With a traditional IRA, the income from your properties goes into your IRA and grows on a tax-deferred basis; in a Roth, your income and earnings will grow tax-free after going back into your account. Compound interest is multiplied in tax-advantaged accounts, meaning that by making this investment through your retirement account, you are securing your family’s financial future without the burden of taxes when it comes to estate planning.

When I started out with single family properties, they were the easiest to sell (and in my generation, the American Dream meant everybody wanted to own a home). But like my father, I learned that apartment buildings were an easier avenue toward building wealth. With many people in one spot, with one roof, one manager, one water bill, and thirty to seven hundred units depending on the building, you are generating passive income at a much higher volume. I fell into retail and office space by buying a building that I was going to rent for my mortgage broker business. Business-wise, this was a great move for me because businesses will sign longer leases to maintain their location, and if that business was successful, then I would receive that rental income over a longer period of time. All of this applies to properties held in your IRA, and if your IRA is receiving many tenants’ incomes over an extended period of time, your wealth will continue to grow.

3. The possibilities are endless.

At times, making traditional investments like stocks and bonds can feel a lot like being in an ice cream shop with only three flavors to choose from. Imagine that same ice cream shop, but with a wide variety of flavors, toppings, and cones. A chocolate sundae with whipped cream sounds more enticing than one single scoop of vanilla!

Similarly, investing in real estate can offer you more variety, as there are so many different ways to invest in this asset class. And isn’t being able to choose what self-direction is all about?

Types of properties range from residential, commercial (including multifamily, industrial, office, and retail), raw land, lots, rehab properties, foreclosures, and more. You can even purchase a boat slip or international (offshore) property with your IRA.

There are also various ways you can make your investments. You can buy a property outright, or you can finance it. For situations in which you may not have all the funds you need to make a larger investment, you can partner your IRA with someone else’s. You can generate revenue through rental income, or you can hold the property in your IRA while its value appreciates.

In 2008, the price of materials such as concrete and lumber plummeted because nobody was buying or developing and all builders shut down, so my thought process was to buy raw land and build houses, warehouses, industrial retail, or office space on that land. When the market came back, I built properties for a lower value with lower labor costs.

I believe in investing in what you know, and whether you’re aware of it or not, you probably know more about real estate than you think. You live, eat, sleep, pray, and work in real estate. You farm and mine on it. It is such an integral part of our day to day lives in all its forms, so why not invest in those forms to build wealth?

4. It is a lucrative lifestyle.

Many people choose real estate for a lifestyle, allowing them to leave their nine to five jobs to pursue a career of financial independence through making their own decisions. This is exactly what my parents did. When I was growing up, my parents owned apartments and made real estate their business, which meant we could travel from Florida to visit our cousins in New Jersey over the summer because they were still receiving their rental income from the properties they owned. When you own a rental property in your IRA, the money is always coming in (especially with a good property management business), and it’s consistent whether you’re at the beach, working another job, relaxing at home, watching your kids’ softball game, or even in the hospital. Investing in real estate is a lifestyle that is secure, straightforward, and as I’ve mentioned before, has less variables than the stock market and banking. These daylong opportunities weren’t as available or easy to find before the creation of the internet. Nowadays, people have the ability to wake up in the morning and immediately see how their business is doing and how much product was sold through the internet. I don’t have anything to sell on the internet, and I like to keep things simple, which is why I choose to invest in real estate.

5. You are not alone.

The beauty of this particular type of investment is its popularity. Many people are interested in, affiliated with, or already investing in this buying and selling process. This level of exposure makes real estate investing accessible and tangible for investors, especially those that are new to the game, and means that the community for gaining knowledge and experience is ever-growing. The number of resources available for you to find connections and education is right at your fingertips. After starting out in investments like these, you can move on to invest in even more asset classes as your expertise expands.

Products that are advertised as “for men” or “for women” cut reachable demographics in half, and that pool gets even smaller when that scope is further limited to children. But real estate isn’t reserved for any specific, marginalized group of people. It’s for everyone, and when the market for a product can reach 100% of the population, it unlocks an even greater potential to build wealth. And that is my favorite part of real estate. 

For the experienced investors out there, what’s your favorite part about real estate?

If you’re new to the game, what attracts you most to this type of investing? What possibilities will you explore?