It’s no secret why people invest, people want to increase their assets. They want larger bank accounts, fatter wallets, bigger pockets, or whatever term you want to you, and investing is one way you are able to do this.
Why Real Estate?
So why invest in Real Estate instead of some other asset class? There are pluses and minuses to any of the forms of investment you can participate in, whether it be stocks, mutual funds, commodities, classic automobiles, or real estate. But here are some of the positives to investment property:
Income Generating- Most investment real estate allows you to generate an income from it during the period you hold it. While some equities may pay dividends, most do not. Real Estate is one of the only asset classes out there that generates revenue by itself through rental.
Leverageable- You can purchase real estate by leveraging up to 80% or more of the purchase price in financing. No other investment is so leverageable. As an example, if you have $100k in cash, you could buy up to $500k in real estate, but only $100k in stock.
Depreciation- One of the expenses the IRS allows you to write off on investment property is something called depreciation. Every year you take a percentage of the purchase price and write it off as an expense, offsetting some of the income for taxes. Essentially, the government allows you to keep more of your rental income every year through depreciation.
Tax deferral- one of the best long-term reasons to invest in real estate is that you can defer the capital gains taxes almost indefinitely. While you will pay income taxes on the net rental income, any capital gains are not realized until you sell. But unlike other assets, the IRS will allow you to take the proceeds directly from the sale and invest in like real estate, without paying capital gains. This is done through a mechanism called a 1031 exchange. If you sell stock, and use the proceeds to buy more stock, you have to pay the capital gains on the sale of the first stock.
Non-liquidity- the biggest disadvantage of real estate versus other investment assets is its non-liquidity. If you need to sell, it can take months, or even years to get a market price for your property. That’s why when you invest in real estate, you need to be prepared to hold it for the long term.
Maintenance and Upkeep- Unlike stocks, real estate is a physical asset that has to be maintained. In order to keep up its value, things will have to be replaced or updated over time, which takes additional cash. Typically these items can be covered by rental income, but there may be years when the property turns a loss due to major capital improvements. In the long term, this evens out with the benefit mentioned earlier, depreciation
Non-mobility- When you own stocks, it doesn’t matter where you live, because you manage it all online or through a brokerage. With real estate, if you buy a rental property near where you live, and then move, you can’t take the rental property with you. This is less of an issue once you get into larger multi-unit property, because you would have onsite management taking care of everything. But if you are thinking about buying a single-family home as a rental, and there is a high chance you will be moving to a different city sometime in the near future, it’s probably not a good idea. It is very hard to manage real estate directly from a large geographic distance.
While there are some disadvantages, investing in real estate offers many advantages over other types of assets. If you’re looking to grow your assets, and you want an investment that will generate an income, appreciate in value, and be tax friendly, real estate is your answer.