5 Reasons to Consider Real Estate as Your Next Investment
by Christopher Levarek
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”
- Robert G. Allen
Many people work day to day jobs to get ahead but this often translates to trading time for money. Time being finite, this trade rarely creates true wealth. The true wealthy have found a method whereby their money creates money, even while they are not working.
Is this in the stock market? Mutual Funds? ETFs? Bonds?
Although these investments can hold value, they pale in comparison to the benefits given by another class of investing. Yes, you guessed it Real Estate.
Specifically there are 5 reasons why Real Estate is in a class of it’s own :
Return on Investment (ROI)
Equity
Appreciation
Tax Depreciation
Leverage
1. Return on Investment
The more commonly understood benefit of investing in real estate is of course the annual cashflows or return on your investment. In real estate, this return comes from the rents of a property (incomes) minus the property expenses, what is termed cashflow.
Let’s say you buy a rental property for $250k with a $55k down payment. You pay around $1100 mortgage and rent the property for around $2100 a month.
So monthly you receive :
Income ($2100) - Mortgage ($1100) - Various Expenses ($500) = $500 cashflow per month.
Your return per year is $500 * 12 (months) / $55000 (Money Invested) = 10.9% ROI
Alright, so ROI is easy to understand, but stocks have ROI, so why real estate? But wait there’s more…
2. Equity
One great reason to buy real estate is the property is building equity as you sleep. Every time a rental check is paid by a tenant, your mortgage or total loan amount goes down. This effectively increases your equity in the property or the amount of value you have between the sales price and the loan amount.
As the loan is paid down and your equity grows, you can tap into that increased equity amount. So in essence you have invested in an asset which not only provides a return on investment, but simultaneously grows in value due to loan paydown.
Loan vehicles such as a Home Equity Line of Credit can then be used to tap into said equity for using on future investments.
3. Appreciation
This one is more commonly known amongst homeowners. As inflation rises, so too does the value of a property. Depending on the market, a property can increase or appreciate 2-3% in value. So the investment into the asset grows through this natural appreciation of the asset.
When you choose to sell the investment property for any reason, this form of appreciation in value means an higher sales price and thus a higher return on your original investment. We like to think of this one as cherry on the top as it’s not always guaranteed.
4. Tax Depreciation
Probably one of the most favored reasons people invest into real estate is the tax benefit or depreciation. Investing into real estate allows an investor to incur depreciation or a paper loss on assets or parts of the property. These assets are deteriorating over time and an investor is allowed to write off this loss of value on paper.
So even though the property is providing a return or positive cashflow, investors can take paper losses or deductions against their income for the year. One can even deduct mortgage interest and a variety of other expenses.
Essentially this means having the ability to lower one’s tax burden through investing, something not as easily done if at all through other investment classes.
5. Leverage
Another advantage to real estate is leverage and one you might have used if you’ve ever bought a home or house. In general this is simply when you purchase a property with bank financing whereby the bank pays for some portion of the property. So you the investor put in say 20% and the bank would then finance 80% of the purchase price.
In this instance, you are purchasing 100% of an asset and realizing the benefits or returns of the property based on your 20% investment. The returns after you pay the mortgage & interest to the bank, are yours entirely.
If this existed in stocks, one would be able to purchase 1 stock of say, Apple or Tesla, for 20% of the cost and 100% of the benefit….something which ultimately of course is not the reality.
In Final
Investing into real estate holds many advantages such as positive cashflow, equity, appreciation, tax benefits and leverage. When compared to other investment types, it can be easy to see why so many wealthy people consider it a fundamental portion of their investment portfolio.
We recommend taking a look to see how real estate investments could help you create more passive income and build tax-free wealth.
Reach out to see how we can help!