Real estate is the perfect investment in an imperfect market. -Kris Johnson
Buying real estate can feel much more intimidating than buying a stock. With a stock you can buy with a few mouse clicks. There are no negotiations, nothing you can do to negotiate the price or to have any reasonable forecast of the returns and influence that.
Real estate is a perfect investment in an imperfect market. What I mean by this, is there are numerous advantages to real estate.
The Internal revenue Service (IRS -tax authority in the USA), provides numerous incentives for investing in real estate.
First is the tax rate. Ordinary income (salary, wages, tips) is taxed up to 35% and also subject to many hidden taxes (FICA, Social Security, Medicare, etc). Whereas passive income (real estate) gains, is taxed at 15%.
This results in the after tax return being substantially higher than a stock return -if you could even find a stock that returned close to the same levels.
Secondly, real estate as an asset class, allows many additional deductions from the income received. These deductions make it appear on a tax basis that the income is substantially lower than what was deposited into your account. Thus, you pay a lower tax on a lower taxable income basis. This requires us to go a lot deeper, which I do in tax advantages of real estate see XXXXXX
Multiple ways of income
Real estate income generates large amounts of personal wealth over time. It does this in more ways than just rents collected. In addition to collecting rents and paying lower taxes on that income, additional wealth is created by:
- Tenants pay off your mortgage -debt destruction
- Property appreciation
- Rents increase with inflation but loan and interest paid does not
- Force appreciation
There is a lot more to understand here and if you are interested, click the links to get into the details.
Higher returns and lower volatility than stocks.
Real estate returns are higher than the returns paid out via stocks. Sure you may be lucky and find the next Amazon, but across a portfolio of stocks, the average returns since XXX have been XXX.
Real Estate has returned XXX in terms of pure income -these returns to do include the tax advantages, the forced appreciation or the debt destruction.
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You can influence
If you have worked in a large company, you have seen first hand how many ways money is wasted. Everything from meeting with large numbers of people and no decisions being made, to excessive perks being paid, excessive expense accounts to numerous failures in projects. As an owner of the business (if you own stock you own the business), we have no voice on this nor any insight into it.
With real estate, you own the business. Real estate investing is a business and one which you run. Now that is not as scary as it might sound and I will show you how and why.
You get to decide how to maintain your investment, how to increase the value, when to sell, what price to purchase for, what interior upgrades make sense. You do this with a team and having a good team is essential. See building your team.
Plainly, you can ensure your business is not wasting money and see this in a transparent way that is not possible with investing in a company.
Always in need
Maslow’s Hierarchy of needs says shelter is a primary need. We need food and shelter before anything else. We all need a place to live and providing safe, affordable and nice housing to people feels good. It not only makes me proud, but also provides me with substantial income and freedom.
I sleep easy at night knowing that people will always desire a safe and affordable place to sleep and that this investment is insulated from the market fluctuations.
Insulation from Economics
When the 2007/8 recession hit and many single family home owners ended up going into foreclosure, the rents for apartments stayed the same and even increased in many markets. Investorswho owned single family homes and “bought smart” also were able to incomes more properties and increase their wealth.
In the dot.com bubble burst around the turn of the century, real estate investors saw little impact to rental rates or cash flow. If they bought smart.
This is because everyone will always need a place to live and the real estate property class is not subject to stock market cycles. The economic cycle in the USA is typically about 5 years (58 months) of expansion followed by 11 months of contraction.
With real estate, I do not care too much, about the market. You should not need to be overly concerned either if you follow my check list on investing by buying smart you will be sure to be safe.