Real estate investing is about financial earnings and reliability. It is also about investing in something that you and most people actually understand. Compared to all other investment strategies, real estate is the most stable investment second only to government-backed bonds and FDIC bank accounts. Neither of which yield enough income to keep up with inflation to say nothing about growing wealth.
Stock markets are the natural alternative investment to compare with real estate. We all know how volatile stock values are as they bounce up and down to the hourly news headlines. These aren’t business headlines. These are global and national headlines about a natural disaster occurring on the other side of the world that has nothing to do with real estate values in your backyard.
But maybe you think you can gain an insight to big business by reading annual reports in deep detail. These are the SEC required reports containing more footnotes, contingencies, and onetime events than they contain real facts and figures. Compare that to a simple financial ledger for a small apartment building, duplex, or single family house that you can touch, smell, and walk through to see the condition for yourself.
Of course, you could begin your own small business so that you have full control of operations. If your business is a retail store or warehouse, you’ll need to be on the job every day for the next 20 years without taking a vacation. But then again, owning real estate is owning your own business. However, small real estate businesses don’t require your full attention day in and day out. Many investors (especially beginners) get started very part time. And yet, real estate is secured by a physical asset that is an overwhelmingly stable investment. Much more secure than inventory for a retail website.
Today, the real estate market is at the high end of the cycle. Rents are high, property values are appreciating at a historic pace, and sales prices hit new highs every month. People that invested at the bottom of the cycle in 2010 and 2011 are making a killing today. These investors are putting cash in their personal bank accounts from rents and sales. Others are making new investments by leveraging the appreciated value from these previous investments in 2010 and 2011. The beauty of real estate investing is you can make money no matter where the business cycle is at. Everyone will always need to live somewhere.
Something that makes real estate appealing to Joe Public is the low barrier to entry. This applies both financially and for business knowledge. You don’t need a master business degree to understand a real estate transaction that almost everyone is involved with at some time in his or her life. Just by spending one weekend reading a few real estate articles or a book you gain a leg up on 90 percent of the people in the market.
Financially, about the only physical asset that lenders trust more are gold coins. Don’t think the only financing option you have is a bank loan requiring a 20 percent down payment. Investors quickly learn there are many financing options out there. When you find a distressed property at 75 percent of market value, you won’t have trouble bringing in a money partner to finance the deal. Another possibility is a lease option where you control the property without owning it. None of these are absolutely free regardless what you see promoted at bad seminars and on late night TV. But it’s not difficult to get started for a couple of hundred dollars.
And then you leverage up. Once you own a property, you have an asset to leverage into additional properties. You can use income from rents and other cash flow to build the down payment for your next investment. As the equity in our original investment grows (from appreciation and paying down loans) you can borrow against that equity to make additional investments. If you’ve ever considered investing in stocks using option or margin accounts, you know how much less risky leveraging real estate is.
And there are big tax advantages that come with real estate investing. The most common ones are depreciation, property tax write offs, insurance, repairs and maintenance, and other business expenses. With the recent Tax Cuts and Jobs Act, there are even more tax advantages for real estate investors. One of the biggest is the 20% deduction of your real estate pass-through income from your personal tax return. There are also beneficial changes to personal property depreciation.
People invest in real estate because no other strategy has proven better for building long term wealth. You don’t need to be a rocket scientist or financial genius to make profitable investments. You don’t need massive amounts of money to get started. You can enter at any point in the business cycle. Once you are started, it’s easy to leverage into ever-greater wealth. The benefits keep rolling in from both cash income and tax advantages. Real estate has created a legacy for many people that otherwise would have had nothing after a lifetime at a 9 to 5 job.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.