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SHOW NOTES FOR EPISODE 096 – TOP 10 REASONS REAL ESTATE IS THE BEST INVESTMENT EVER
Your choice of investments in today’s economy are almost too numerous to list; bank CDs, savings bonds, stocks and bonds, mutual funds, precious metals, and the list goes on and on. In this episode, Bill examines the top reasons why real estate stands alone as a superior investment compared to all other investment options out there.
Before we get started, I wanted to share a great resource for real estate investors. At http://olddawgsreinetwork.com/resources/ you can get copies of past Od Dawg newsletters and there is also our Top 20 Real Estate Investing Books. These books are our top picks for anyone getting started in real estate investing.
I am going to start featuring these great books on a regular basis on Fun Fact Fridays. Becoming familiar with some of these great books will be of tremendous value for those of you who have not had the chance to read these books.
One of my favorite all time real estate investing books is Ken McElroy’s The ABCs of Real Esate Investing. I would say it is even in my top 3!
Ken is one of Robert Kiyosaki’s Rich Dad Advisors and has a successful real estate investing business and has also written the The Advanced Guide to Real Estate Investing by Ken McElroy.
Today, I’ve taken the libery of adapting a list in chapter one of The Advanced Guide to Real Estate Investing, entitled “The Power of Real Estate: Ten Advantages.”
Introduction
Real estate is the ultimate investment. Nothing else provides the same kind of dollar-for-dollar returns and has the same kinds of advantages. If I had a choice to invest $1 million in real estate and $1 million in Microsoft stock, I would choose real estate, hands down. Even if the real estate appreciated at half the rate as the stock, I would still come out way ahead when you factor in leverage, tax advantages and cash flow.
This thinking goes counter to much mainstream thought. We are bombarded by articles, commercials and advice to invest our money in stocks, bonds or mutual funds. Major investment publications tout the advantages of mutual funds and the stock market, while downplaying the viability of real estate as an investment tool.
Why? You only need to flip through the publication to see who their advertisers are…
I am going to list 10 reasons why real estate is the best – hands down!
1. Cash Flow
- It produces cash flow every month
- Larger cash-on-cash return (on average) over other investments
- Cash flow will generally go up every year
- Cash flow can replace your W2 income and help make you financially free.
2. Control
- Other investments you pay and your money is in someone else’s hands. You have no control. You’re at someone else’s mercy
- You can make no operating decisions
- With real estate, you purchase a “tangible asset” and YOU manage it!
- You can increase income and decrease expenses directly – thus affecting cash flow AND property value
3. Appreciation
- Historic appreciation levels for real estate have been 6 percent per year, according to the National Association of Realtors. That’s the average, so there are areas that far exceed and others that are less.
- Add appreciation on to your cash flow/cash-on-cash return and your return-on-investment goes even higher
4. Leverage and Other People’s Money or OPM
- Leverage is one of my favorite things about real estate investing
- The idea here is using money generated from someone or something to start a business or acquire an asset
- The bank, for example, will lend you money to buy a property because the property is “security” for the loan. But will that same bank lend to you to buy stocks? No, because there is no “security” or tangible collateral in the stock.
- Real estate is a physical asset that has tangible value
- It gets even better when you consider that I can put in only 20% of my cash, the bank finances 80%, yet I control the asset which is going up in value every year. Take this example:
- I put $40K down to buy a house for $200,000 (the bank finances $160K on a 30 year loan). In 30 years, taking the average 6% appreciate rate I mentioned earlier, the property is worth $1,083,678. So, if you divide the $1,083,678 by the $40,000 you invested, that’s a return on investment of 90.3% per year. Where else can you get that kind of return? And that doesn’t even include the cash flow generated!!!
5. Depreciation
- The IRS considers depreciation to be an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. In other words, it is an annual allowance for wear and tear, deterioration, or obsolescence of the property.
- Nonoperational expense
- You can depreciate residential property for 27.5 years and commercial for 39 years.
- Applied against cash flow
- Depreciation can literally result in you paying no tax at all
6. Refinance
- Another advantage of real estate over other investments is the ability to withdraw cash through a refinance of the property and still keep the property.
- This, too, is a tax-free transaction. When you refinance a property you are restructuring your existing mortgage debt based on the added value of the property
- Many investors opt to refinance a property rather than sell it
7. Asset Protection
- There are a number of ways to legally protect your real estate investment that cannot be utilized with other standard investments.
- Real estate is one of the few investments that can be insured. If the property is destroyed for whatever reason, you are able to claim losses for the actual value of the asset before the loss, and during the loss.
- Legal advantage: place property in LLC, thus protecting your personal assets
8. 1031 Exchanges
- When you sell your investment property and have made obscene profits, you can just roll the money over into another property (within the required time frame) and not have to pay any capital gains.
9. Hedge Against Inflation
- Many people feel that the commonsense thing to do with your money is to put it in a savings bond or bank account that yields 1-2% per year.
- Some feel it’s safer. The problem is you don’t make any money. The reason is inflation.
- Real estate is a tangible asset – a good. That means it will generally rise either at the rate of inflation or much higher.
10. It is a Physical Asset
- It is not a cerebral investment that is traded by the click of a button or an online brokerage. I can hop in my car, drive to my property, walk the grounds, inspect buildings and talk with my tenants.
- It is not subject to the volatility of other investments like stocks.
- If a company announces poor earnings, the stock will go down fast, leaving you no time to react.
- Real estate is different.
- While it may have its ups and downs, for the most part it is slower to react. If you are paying attention and know what to look for, you can see the trends well before changes happen. You have time to form a plan and strategically react. Maximizing ROI, or cash-on-cash return, is the key
Conclusion
I’ve just shared 10 advantages of real estate investing over other investment types and I know there are even more. I firmly believe that there is no investment more powerful than real estate. It can generate immediate returns, tremendous tax advantages and a bonus of significant equity in just a few years or when you sell the property or refinance. It’s an investment whose benefits are numerous and enduring.
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