3 Reasons You Must Invest In Real Estate

People today are investing via a 401k, brokerage accounts, or individual retirement accounts (IRAs). It is not good to have all your eggs in one basket i.e. the Stock Market.

However, today I would like to share with you why today more than ever before is an exciting time to begin a journey in building a portfolio of assets in this asset class called Real Estate.

Many avoid it due to its illiquidity; it is harder to manage, and “expensive.” These are all seen with a limited point of view but with the right knowledge, opportunities can abound. I want to share a few reasons why Real Estate Investing is vital.

3 Reasons You Must Invest In Real Estate

Reason 1: It is one of the best if not the best hedge against inflation.

During times of higher inflation like we are in presently, investors take refuge in assets in precious metals like Gold, U.S. treasuries, and now even cryptocurrencies Bitcoin. Real estate is the best due to land or real estate being constant.

You can only improve land and not add square footage to what is already on Earth. As purchasing power decreases the prices of real assets increase.

This could be said for Gold as well because from 1969 to 2019 the price for a troy ounce of gold went from 240 USD to 1 500 USD adjusted for inflation.

However, this would only be good if you sold the gold after 50 years, with Real Estate you not only get capital appreciation, but you also stand to obtain cash flow. Gold is not a productive asset but it only saves/preserves wealth it doesn’t add to it.

 

Reason 2: Taxes

Another benefit of the real estate asset class is the tax advantages it provides. Unlike when holding paper assets like stocks and bonds you can capitalize on tax credits, tax deductions, the ability to use depreciation and operating expenses to write off against income generated from not only the property but from yourself personally!

Saving on taxes not only helps in keeping more of what you earn but it adds in you being able to reinvest more back into building your portfolio. Whether you want to turn your property into a value-add investment or acquire another property.

There are strategies in real estate that you can research more on such as investing in opportunity zones, 1031 Exchanges to defer taxes, having affordable housing units, and more. There are numerous incentives from your local, state, and federal government in the United States and as well as internationally for investors globally.

 

Reason 3: Leverage in Real Estate is less risky than in Stocks and is more prudent

How did I come to that conclusion? Well to start, much of the real estate that is sold today is bought with the use of both debt and equity (down payment). Not many people have 1 USD million dollars in the bank ready to purchase a property outright

You tend to see 20% down or 200 000 USD given in down payment and the remaining balance of 800 000 USD given as mortgage with a fixed interest rate, terms, and conditions depending on other factors. These include credit, the term of the loan, benchmark rates, and the prevailing economic conditions.

It’s better to use debt in real estate as you are able to acquire and gain control of multiple assets that not only can appreciate if vetted properly but can generate income from rents. Investors should invest based on good prospects in location and metrics such as cap rate, IRR, cash on cash return, and so on.

Rather than buy one property valued at 1 USD million, buy and control 4 properties of 250 000 USD each with the same money. I don’t recommend using debt with stocks as the value of paper assets because it is more volatile and based on many factors and more heavily investor sentiment in the short term which may trigger a margin call.

Even if the economy contracts so badly and the market value of your property falls until it’s “underwater” you won’t get a margin call in real estate. If the asset is cash flowing you have mitigated some risk and can even patiently ride out the wave until economic activity rebounds and the market value of the asset returns.

 

Conclusion

I hope today you have gotten a better understanding and an interest in real estate investing. All investing has risks, it’s important to invest not out of fear but with a plan. You cannot eliminate risk completely, but you can mitigate it and manage it well to be well compensated for it.

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Writer: Nicolas Dominique
Editor: Evelyn Tobing

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