“I just can’t find the deals!” Another investor complains. Yeah… I know. I have heard. The truth is, it is hard to find deals, but real estate is still a far superior investment to stocks and most other investment options. Now before you start throwing rocks, this is just my opinion, and I am sure there are many investors that disagree. Many millionaires have also made it in the stock market too, but here are my 10 reasons I think real estate is a superior investment.
I like to think of appreciation as a bonus. It just happens, but I never make an investment decision based on it. Appreciation is the property value increasing over time. When you consider leverage, which is discussed below, appreciation is a huge benefit. Stocks can outperform real estate when you look at values alone, which many investors do, but they are far more volatile. For the most part, real estate values are more stable and will always increase when given enough time. The national average home appreciation is close to 3.9% over the last 20 years. This accounts for the 2008 credit crash that negatively impacted real estate like nothing else in history. Recent appreciation has been double digits in many parts of the county.
This can be confusing. The IRS assumes that as you use real estate, it diminishes in value. Because of this, they allow you to reduce the value of property on your books and take that depreciation as a loss on your taxes. It is a huge tax benefit without it costing you anything. Depreciation is often referred to as a phantom loss because you don’t actually lose but get the tax break as if you did. No other investment vehicle will produce this tremendous benefit.
3. 1031 Exchange
Speaking of tax benefits of real estate. Most assets that are sold will be subject to a capital gain tax. The capital gain tax is based on the difference of what you paid for the asset and what you sold if for. If you buy a stock for $1 and sell it for $2 you would need to pay taxes on the gain of $1. The same is true with real estate, with one major exception. A 1031 exchange allows the real estate investor to roll the gain into another property and defer the taxes on any gains until they sell the new property. This allows the investor to make a much larger investment than they would if they needed to pay the taxes. It is possible for the investor to do a 1031 exchange on the new property and defer taxes again. In fact, they can continue upgrading their real estate by doing 1031 exchanges until they pass the real estate on the heirs and never pay taxes on any gains.
4. Cash Flow
This is the biggest reason I invest in real estate. Real estate can be rented out and can generate monthly cash flow. Passive cash flow is how investors get rich. The idea is to set up a machine that spits out cash every month, like a rental property. Once it is up and running shift focus to setting up another machine. Continue until you have more cash flow than monthly expenses. There are dividend paying stocks but, in most cases, to get the cash flow you give up on the growth potential of the stock. In real estate, if you are buying good assets, you should easily outperform cash flow potential in stocks without giving up on appreciation.
This may not be true for everyone, but I find it much easier to find values in real estate. To me, a value investment in stocks is a gamble. It is speculating on something you believe will happen in the future. And you are competing with millions and millions of other investors. Stocks sell at their value because there are many buyers and sellers. With real estate, you may be the only buyer speaking with a seller. Sellers in real estate can find themselves in situations where they need to sell and need to sell fast. These are opportunities for real estate investors. If you can fix a homeowner’s problem, you can get a great deal on a property.
6. Inflation Hedge
Real estate is a real asset, meaning you can touch it. All real assets tend to perform well during inflationary times. If you think about the money supply increasing, you may have a little more money in your pocket but now the milk and gas costs more. You know what else cost more? Housing. Historically we see an increase in rent and home values with inflation. Inflation is coming!! We are already seeing it, because of the ridiculous amount of spending in the last 15 months.
No one is making any more land. The simple fact that real estate is limited makes it valuable. It also makes me more comfortable with the risks. You know the saying, “Everyone needs to live somewhere.” There will always be a need for housing and every house will rent at the right price.
8. Can be Improved
Improving a home should increase its value. Many real estate investors make their living finding homes that need to be rehabbed so they can fix and flip them. There is great money in that business. If you can locate distressed properties and fix them up, you can force appreciation and enjoy massive investment returns.
9. Can be Enjoyed
Not all real estate plays are long term rentals. Many investors have gotten into the short-term rental game. I just purchased a home in a mountain town in Colorado. The idea will be to use it as a short-term rental to generate a return on my investment, but I will also have the option to take my family up there for the weekend. I have never relaxed with a cup of coffee on the deck of a stock.
Obviously, a double edge sword, but any time you can use leverage you can magnify returns. In the simplest example, if you have a house worth $100,000 and it appreciates 10% it would be worth $10,000 more. If you got a loan and only put down 20% to buy the house, your investment would be $20,000. A $10,000 gain on a $20,000 investment is a 20% return. Those numbers are hard to hit anywhere else.
Pine Financial specializes in real estate investor financing. We are high leverage lenders and can fund 90% to 100% of your investment purchase, including the money to make the repairs. If you have a project you are looking at, whether you want to hold it and rent it or improve it and sell it, give us a call. We have money for your deals!