Real Estate - The IDEAL Investment

By Christopher Levarek

For the investor today, there are many options for creating future wealth to include stocks, bonds, options, annuities, retirement vehicles and even insurance. With this being the case, why would someone choose to focus on real estate over some of these more commonly understood investment products?

In this post, we’d like to address an acronym that details why investing in real estate shines above the rest in most situations. Real estate is the “I.D.E.A.L.” Investment. Each of the letters in the word, IDEAL, can be attributed to the five key benefits to investing in real estate:

I - Income

D - Depreciation

E - Equity

A - Appreciation

L - Leverage

I is for Income:

Income in real estate means cash flow or profits and is usually the number one thing most people think of when thinking of real estate or any investment. What is the ROI, return on investment, for this transaction? This is usually how someone would compare investing in stocks to investing in real estate. As detailed in a recent BiggerPockets article by G. Brian Davis, real estate has outperformed equities, bonds and treasury bills on returns over the last 145 years.

D is for Depreciation:

Owning real estate allows one to declare depreciation expenses on tax returns related to the property yearly until the property is sold. This means that an investor can have a much lower tax burden by depreciating real estate/real estate assets thus creating a tax shelter and incur lucrative tax savings.

E is for Equity

Traditional purchase of real estate will involve some form of a mortgage or loan. When the loan is payed-down, the equity or ownership of the property grows for the investor/owner. If real estate is purchased and financed correctly, tenants of said properties will pay-down the debt or increase the equity for the investor/owner without any additional funds from the investor. Increased Equity = Increased Net Worth, or increased ROI.

A is for Appreciation

Real estate property values and rents grow year after year following the economy and inflation. This is known as appreciation and tends to be around 3-4% per year depending on the market or location. This means, an investor in real estate can expect increased returns or increased net worth by simply owning real estate year after year.

L is for Leverage

One of the major benefits to investing in real estate is the opportunity to buy assets or investments using leverage. Leverage is the ability to buy something using only a portion of the total cost of the investment. For example, buying a $100,000 property using only $20,000. Being able to achieve a great ROI for a fraction of the cost of traditional investments is a major advantage to real estate investing and sets a lower bar of entry for anyone to get started.

Invest Smart!