There are quite a few options available when it comes to investments. Stocks, bonds, mutual funds, options, futures, real estate, currency, collectibles. The list goes on. How do you choose which investment is best for you? The answer to this question will vary from person to person, but let me explain why I believe everyone should include real estate in their portfolio. Here are five reasons why real estate is the best investment.
Leverage is a powerful tool. To put it simply, leverage is when you borrow money to purchase a larger asset. The most common example is when you pay for the down payment on the purchase of a house. The bank covers the rest of the purchase in the form of a mortgage. You then pay the bank interest on your loan until the loan is paid off.
Let me show you the impact leverage can have on an investment property. Let’s say you have $100k in cash and you find a house for $100k that you want to purchase. Let’s assume you pay all cash for the house and you now own it completely. After a year of owning the property, the value increases and you sell the house for $120k (we’ll ignore taxes and other expenses for the sake of simplicity). You made $20k in profit on your $100k investment. In this example, your return on investment is 20%. Not bad at all.
Now, let’s say that instead of paying $100k to purchase the property outright, you put down $20k as a down payment. Again, let’s say that you’re able to sell the property at $120k after owning it for a year. Of course, we need to factor in the mortgage payment that you have, which would be around $5,000 for the year (about $415/month). That’s $15k in profit on a $20k investment, a 75% return on investment. Do you see how powerful leverage can be? I haven’t even mentioned that you still have $80k left over to invest. You can use the leftover money to do the exact same thing with four more properties!
Leverage can be a double-edged sword, so be careful. Being over-leveraged can be extremely risky and lead to a lot of problems if you aren’t able to repay your debts. It’s important to find the right balance for your specific situation.
Real estate is a tangible asset. This means that you can physically touch it. It also gives you control. Unlike with a stock, you have the ability to add value to your real estate property in a variety of ways. You can replace the roof, you can renovate the kitchen, you can repaint the whole house. You’re in the driver seat. All of these things increase the value of the property, which can increase your return on investment.
With most other investments, you have almost no control over the performance of the investment. You’re at the mercy of the company or the manager of that investment. This may be better for those who have no investment experience or time to manage their investments themselves. But for the savvy real estate investor, control can create tremendous opportunities to generate excess returns.
Ability to Negotiate
With most investments, you pay the price that the market sets for that investment. With real estate, it’s a different story. Real estate prices are negotiable, which means you can decide what price you want to pay for it. If the seller isn’t willing to sell at that price, you walk away and find another property.
Let’s say you find an investment property you really like. You analyze the numbers and realize that your return on investment would be too low if you bought the property at the asking price. You have the ability to negotiate with the seller and try to bring the price down to a price that better fits your criteria. Now, you’re able to get the property at the price you want, and the seller was able to get the property off of their hands. It’s a win-win.
Negotiation is a valuable skill that takes a lot of practice to master. One of the most important negotiation tools is having the power to walk away. This almost always gives you the upper hand in a negotiation.
In my opinion, this is the biggest benefit of investing in real estate. It’s almost impossible to find another investment that can provide as much cash flow as real estate does. Cash flow can give you so much freedom. Imagine generating enough income through your real estate properties to cover all of your life’s expenses? You’d be free to do whatever you wanted from that point on. You’d be financially independent. It's also one of the ways to make money in any market.
The other huge benefit of cash flow is it can be your protection when the market goes south. As long as your property is bringing in positive cash flow each month, you don’t have to worry about the value of your property. You can simply wait until the market recovers and the value of your property goes back up to sell at a profit. Or, you can hold on to the property and continue to collect the income each month. The choice is yours!
The government wants you to own real estate. They encourage this by offering many different deductions and other tax benefits for real estate owners. When you own an investment property, you can take advantage of depreciation, mortgage interest deductions, and many other tax benefits. Also, if you sell the property after owning it for more than a year, you’ll pay long term capital gains taxes, which is lower than the usual tax rates.
There are many other tax benefits involved with real estate investing (1031 exchanges, cost segregation, tax-free cash-out refinances, etc.), but those are topics to cover some other time.
*I am not a CPA, so please consult with a qualified accountant to discuss your individual situation and tax needs.
This is not an exhaustive list on the benefits of investing in real estate. There are other benefits as well, but this should give you a good idea of how powerful real estate investing can be. As with any investment, returns are not guaranteed. It’s important to do your research before making any investment decisions. Everyone’s situation is different, so make sure to evaluate your decision and decide what’s right for you.