My father has a great saying: “We keep making more people, but there isn’t more land.” Specifically, population in the world is currently (2017) growing at a rate of around 1.11% per year. The current average population change is estimated at around 80 million per year. *worldometers.info
I’m pretty sure this is the very definition of a positive supply & demand scenario. If ever there was compelling logic to make an investment, it is a situation in which the demand always goes up and the supply cannot. Besides this most obvious reason though, there are quite a few other potent factors in play. So, without further adieu, here are my top eight reasons to become a real estate investor:
8) You can be active or passive and both work. If you’re the hands-on type of person who likes to fix and improve things, you can increase the value of your investment with your own sweat equity. Try making a company you own stocks in operate more efficiently! If, however you don’t fancy yourself a handy type, then you still grow your investments by letting others handle the work and (if you made well informed investments) you’ll still have good margins.
7) It’s an asset you can actually use for yourself. When’s the last time you had a good night’s sleep in your savings account? If you are in the midst of some major life changes, you might find yourself in a position where you become a consumer of your own investment for a time. In other scenarios, I’ve had clients who use part of a rental property they own for their business. An auto restoration specialist using a detached garage on a two-family rental comes to mind. You can have a space to conduct your business and own a property that generates income instead of being a fiscal liability.
6) You have 100% control. Although you will likely conduct purchase (and perhaps rental) transactions with a real estate agent, you won’t be needing them every time you collect a rent check. Unlike stock trades where you are using an agent or investing in business ventures where the operations of the business have nothing to do with you, real estate is an asset where you can drive the ship at all levels.
5) You can add value to the investment. Your IRA is wonderful and so is compound interest, but can you add value to it with a fresh coat of paint and some nice shrubbery? The amount of rent you can collect can be directly affected by improvements you make to your property as can a resale price when the time comes.
4) Research is much less complicated than other investment vehicles. Yes, you can dump money into mutual funds with little to no research. You can buy individual stocks the same way. Is anyone building millions on dumb luck like that? Wealthy stock traders do tons of research in ever-changing markets. Successful angel capital investors do a ton of due diligence on the companies they will be investing in. With real estate, there is some research needed to succeed, but it is not nearly as complex or as volatile as with just about any other investment. Yes, the market has had bubbles and bursting of said bubbles, but in the long view values continue to rise. If purchasing is down, renting is up. If the rental market is weak, it’s because people are buying again. Either way, you have a versatile asset that you can rent out or sell. The amount you can ask for requires no more than a day worth of research into the locale you’re property is in.
3) Appreciation. I just touched on this above. You can, over time, count on your property to grow in value. Obviously, if you buy at the height of a rapidly growing market, you may face a period where your asset loses resale value for a time, but it will come back. In a normal environment, growth will be slow and steady. We only have a couple hundred years of history to back that up.
2) Depreciation. This one is not often spoken about, but it is my #2 most compelling reason to invest in real estate. Title 26, U.S. Code 167 sets forth the tax benefits for investment property owners. In short, you can deduct from your income (not just that earned from your real estate, but even your employment income!) an amount based on the depreciation of your real estate assets. There are various formulas based on property types and you should consult an accountant, but never miss out on your chance to increase your return on investment by also cutting down on your tax liability with depreciation. I cannot overstate how powerful this is if done properly.
1) OPM. When most people think about their retirement, they set up an investment fund through their employer and save $x per month. It goes into the fund and also grows internally as the interest from the fund goes right back into it and you build quite a nice nest egg. The key factor here is that all the income going in to build the fund COMES OUT OF YOUR PAYCHECK. How much better would it be if you only had to put 20% of the money in and a bank would lend you the rest at less than half the interest that it’s earning in the investment vehicle? If you’re getting a loan at 5% and the investment is making 10%, then you would be smart to borrow every penny they will offer! I’ll gladly take $1,000,000 at 5% interest to make 10% back on it. That’s a net gain of $50,000. Lend me $500,000,000 would ya’? This is exactly what happens with real estate investing. You don’t buy investment properties as all cash deals unless you might be turning around and selling them very quickly. If you’re going to hold and rent, and your cap rate (we will discuss this next week) is anything decent, you will earn returns faster than you pay interest on any loan. Your investment capability will only be limited by how much you can borrow and that amount will increase over time and as your portfolio grows. There’s no better way to become a multi-millionaire than on the backs of billionaires.
So there you have it: My top 8 reasons to invest in real estate. Next week I am going to compare an IRA with a good avg. return against a real estate portfolio with the same.
As always, if you have any question or comments, feel free to contact me. I always love to hear from you.