Have you ever wondered why owning real estate is considered a good investment?
I am a licensed real estate agent, that has helped his clients buy and sell real estate for over a decade. Additionally, my undergrad is in business finance and my graduate degree is in Accounting, I have studied real estate for over 25+ years and owned multiple investment properties. My extended family has been in real estate since before I was born and we’ve benefited greatly with the investments we’ve made in real estate. All that being said, please note, I am not an investment advisor, the post below is from my experience as an active member in the real estate industry. With that in mind, here are my top 10 reasons why real estate is often considered a good investment.
1) You can buy a home and live in it, you can’t do that with Stocks, CDs, Bonds, or any other investment like cryptocurrency. This is a very simple but often overlooked part of real estate that most people seem to forget when they are considering investment options. Real estate is tangible, it's here and now, it's real, and you can see, touch, and feel real estate. It's not some nebulous asset in a portfolio of assets that shows a paper profit and seems to be outperforming the market. Real estate is tangible.
2) You can write off the interest expense you pay on the mortgage against your taxes, thereby lowering your tax liability. The interest expense you pay your lender is a write-off that the IRS allows you to take. Simply put, the government likes real estate, it wants you to borrow money and buy property. The amount of losses you can write off with stocks and bonds are very limited, while with real estate you can write off more than any other asset class in any given year.
3) Rent prices generally go up with inflation and you can bet more likely than not that the rent you are paying today will be a fraction of the rent you will have to pay thirty years from now for the same property. With real estate, you can lock in a rate on your thirty-year fixed mortgage, and your payment stays locked in for the life of the loan, meaning your monthly payment will not go up, giving you a piece of mind. Thirty years from now you will laugh at the monthly payment that gives you anxiety now.
4) You can buy real estate with little to no money, as in nothing out of pocket. This sounds like a scam, and I used to think it was until I started learning about how to buy real estate. There are countless bank-backed lending programs, government grants, and employee assistance programs that are available to everyone at any given time, such that you can buy real estate with zero money out of your pocket. The first and second homes I bought, were with zero cash out of pocket, and my wife (who was my agent at the time) got paid commission, so we walked away with money in our pocket while we took possession of the property. You can't do what we did with any stock, bond, or precious metal, or any other asset. If you know of any other assets please send me a private message I want to know about it!
5) When you buy multiple homes, you can rent out your properties and have someone else pay your mortgage down. You must do a good job of prequalifying your tenants, this is probably the biggest mistake most amateur landlords with horror stories make. My point is, that you have to do a good job of running background checks, income checks, and credit checks, you MUST do your due diligence. On my third property, I had a family stay there for over three years, and they paid me over $100,000 to stay in my home. In some ways, my tenants are better than my good friends because my tenants pay me and they are happy to pay me while my friends are always looking at me to pick up the tab when we go out for drinks. I offer the best customer service to my tenants and I treat them with respect and due care, and they pay me back by paying off my mortgage and taking care of my properties. You have to maintain the property and that requires some cash however the return you get on the investment far outweighs the minor maintenance cost.
6) Leverage, Leverage, Leverage, with real estate the banks are willing to finance your entire investment. You cannot do that with stocks, you will quickly get a margin call if your stock price falls below a threshold. No one calls you if your home value drops a few thousand dollars in value. Banks are willing to finance your entire real estate purchase because banks are run by smart business-savvy investors who know how to manage risk and maximize returns. Banks know there is significant volatility in the stock and bond market, with volatility comes risk, and most banks are risk averse. This is why banks are willing to lend on property over other investment opportunities.
7) You can write off depreciation expenses against your taxes. Outside of mortgage payments depreciation expense is the second biggest expense I write off every year against my revenues, lowering my tax liability. I am a big fan of depreciation expense, it works for me 24/7 and I use it to my advantage. In addition to depreciation, I also write off minor maintenance and the cost of owning, advertising, renting, and managing the property. My goal at all times is to lower my tax liability and real estate helps me make that possible.
8) Passive income, meaning you don’t have to actively work to get paid. I think most smart people are lazy. If given the chance to get paid for not doing anything versus working actively to get paid, the smart decision is to conserve energy and get paid for doing nothing. With real estate, you get paid every month for doing practically nothing. I love passive income, and I like to limit my tax liability. Google the tax rate for long-term capital gains and passive income and you will see the difference. Passive income is a pass the IRS gives you to become wealthy slowly over time while being lazy.
9) Price appreciation, Real estate properties have historically shown the potential to appreciate over time. While there can be market fluctuations, many real estate markets tend to appreciate in the long term, which can result in substantial returns on investment. As long as the property is in a good location and the surrounding area is in demand the price will tend to beat and or exceed market return. I look for areas where builders are building new commercial real estate and expanding out. There is big money being poured into that area and the surrounding real estate is going to have a better chance of appreciation than the market average.
10) Diversification, let's face it, you don’t want to put all your eggs in one basket. If you live in the US and you have a decent job, chances are you have a 401k or an IRA that you are most likely contributing to for retirement. The money that is in your 401k is usually put in stocks and bonds and spread over multiple companies in different industries. Investing in real estate provides diversification away from stocks and bonds, and reduces your portfolio risk while increasing your returns over time. Please note investing in Real estate is a long-term strategy, I stay away from quick cash, even if I make money at it, the risk and the tax consequences from short-term (less than 1 year) gains are very unfavorable.
Conclusion:
Real estate is often considered a good investment because of the low risk high return you can potentially expect to receive from your investment. Real estate provides great tax benefits, it can used as a tool to diversify against the stock and bond market, or used as a way to save for retirement. Real estate requires patience and care. I have personally seen many of my family friends, and clients make millions from buying and holding properties, developing land, and rehabbing real estate projects. If you have any questions about buying, selling or investing in real estate, please give us a call or a quick note and I will be happy to help you make an educated decision based on risks and rewards.
