Investing in real estate for profit is one of the most popular approaches to generating additional income in the United States today. It has been for years. When done carefully and intelligently, real estate can yield fantastic benefits that are tough to duplicate through other types of investments. I personally started buying rental properties and flipping houses many years ago. I don’t do much property flipping anymore but rental properties are still a big part of my portfolio.
The thing that I’ve found that keeps many people away from real estate investing is fear. People are afraid of losing money, fixing toilets in the middle of the night (which by the way I have never done), having to evict someone or they’re simply afraid of all the things that they don’t know. This last one is a biggie. You can’t put your money in the hands of a real estate broker and ask for guidance the same way you can with a stock broker. The good news is that it’s the easiest to overcome AND it will help eliminate some of the other common fears that plague would be investors.
The key is self-education. You will need to make the time and put in the effort to learn a few things about investing in real estate. I know that without proper motivation to do it, we as busy productive adults, get sidetracked and sometimes fizzle out before we cross the finish line.
“Formal education (high school and college) gets you a job. Self-education gets you rich.” -Jim Rohn
Here are just a few examples of why real estate investing can be such a powerful wealth generator. Hopefully these “whys” can help keep your motivation level up so you persevere, make the time, get educated and get out there and start making something happen.
1. Real Estate Markets Are Slow to React. Although real estate, like everything else, has ups and downs, it is generally a lot slower to react than the stock market. For example, you won’t get up in the morning and discover that your real estate investment is worth ten or twenty percent less than it was yesterday. With the right knowledge and by paying attention, you can avoid down turns in the market. Given that your properties are assets in your portfolio and not your primary residence, you can sell at any time.
2. Leverage. You can borrow money to buy real estate, whereas, generally you can not borrow money to buy stocks. You can control a large dollar value of real estate with a small amount of your own money by using loans and mortgages. The stock market, by law, limits the amount of leverage (margin) you can use to buy stock. There are no such limits with real estate. OPM (other people’s money) is a beautiful thing. Make it work for you!
3. You Can Purchase Real Estate For Less Than Its Market Value. In some cases you can purchase a property for as low as 60 to 70 percent of the market value. Admittedly those significantly discounted instances are rare but they do happen. 20 to 30 percent however is more common and nothing to sneeze at either. When buying stocks, you may be able to find a stock that is considered “under valued” but generally that’s tough to do.
4. Real Estate Offers A Tremendous Amount Of Tax Advantages Through Depreciation. Real estate basically has two values, the land and the building(s) on the land. For example, if a property is valued at $250,000 and the assessed value of the land is $75,000, the building would be worth $175,000.
The government allows real estate investors to depreciate the value of the building in equal parts over its “useful life” which is defined as 27.5 years. So for example, based on the $175,000 building value above, the annual depreciation value would be $6,363.63 ($175,000 divided by 27.5). This means that for tax purposes, the investor would be able to reduce his/her annual income by $6,363.63!
Many people find the notion of depreciation to be confusing since it’s not really a loss of money. I recommend you check with a qualified tax professional for more details and how this can benefit you.
5. Real Estate Markets Are Insulated Local Markets. For instance, when the stock market falls, it takes down just about everybody and everything involved with it. When home values drop in one city such as New York, generally it does not affect property values in other cities like Boston or Chicago. To protect yourself, you can have a “geographically diversified” portfolio of real estate investments to hedge against these types of events.
As you learn more, you’ll become less and less concerned about the location of your portfolio properties. You’ll be focused on the markets that represent the best opportunities regardless of where they are.
6. You The Investor Can Control The Value. Another aspect of real estate investment is that unlike any other investment, this investment is controlled by the investor (You). For example, as an investor, you can increase the value of your investment by making some modifications to the property such as adding a garage or replacing the carpet, etc. With stocks or any other investment, the investor can’t do anything to increase the value of the investment. They are just along for the ride.
7. The Efficient Market Hypothesis (EMH). When a market has prices that always "fully reflect" available information, it is called "efficient”. The stock market for example is considered by most to be an efficient market. When you call your broker to purchase or sell a stock, you can be sure of one thing – the price you bought or sold the stock for was indeed the “correct” price for that stock on that day and at that time. Why? Because the existing price for the stock will already incorporate and reflect all relevant available information about the company such as earnings, and other metrics. (Understand that I’m not talking about value here. Price and value are very different)
With real estate, the market is very inefficient. Unlike the stock market, with real estate, the “correct” price discovery mechanism is left to each buyer and seller to figure out on their own. There is the almost always uncertainty as to whether the price offered by the seller is too high or too low. Moreover, there is typically little to no help available from analysts and research agencies (like when dealing with stocks) in this respect. This inefficiency is the very reason why real estate offers such a great investment opportunity to be smart and win! But it requires experience and a sharp eye for good deals and great negotiation skill. This expertise can be developed.
If done correctly, real estate is probably one of the smartest investments you could ever make. Hopefully this short rambling has provided you with a fresh perspective of the many benefits of real estate investing. So be smart, continue to learn and above all don't wait for some magic moment, just get started.