Why is real estate a better investment than stocks and other investments?
One word - Leverage!
Example - say you have $100,000 to invest.
How much stock can you buy with $100,000?- $100,000 in that stock of course.
How much property can you buy with $100,000?
You could buy 1 $100,000 property; you could buy a $200,000 with a 50% mortgage
Or you could easily buy a $500,000 with this $100,000 as 20% down!
Now you have a property that if purchased right will bring in monthly cash flow.
It also builds in equity over time, you can depreciate the "use" on taxes, and you can make simple improvements that increase the value.
Do you know anyway you can increase the value of stocks besides hope and prayer?
Improvements to the property can help with deductions and increasing the value of the property.
Also insurance - if the company you own stock in crashes and burns what happens to your money? It is gone.
If your property burns down, you have insurance that will pay to replace it!
Also after a few years say your property increases in value to $700,000
You now have $200,000 in equity - many will say this is only on paper and you have to sell to obtain this money, right? - Not necessarily
- Sell: you could and then have to pay capital gains tax.
- Refinance: Pull out $200,000 in equity (no taxes paid as is not "income" (side note I am not an attny/accountant - seek advice of a professional) and purchase another $500,000 or even $1,000,000 property.
-Also may have a problem pulling out all the equity, only partially
3. Exchange: Best option, sell but complete at 1031 exchange into a larger, better cash flow producing, return on investment property and thus building you more wealth.
One more point - there are also cases where you could buy a property for less than market value if you can find the right circumstances. Can this be done with stocks? - No
You can buy real estate as an investment with your IRA - Tax free income that goes right into your retirement account.
Benefits of real estate investment.
- Cash Flow
- Appreciation: Over time the property increases in value.
- Principal Reduction: Loan is paid down by your tenants
- Income Tax Savings: IRS rules allow owners to take depreciation deductions, which shelter the cash flow and principal reduction. Any leftover depreciation creates a paper loss which in many cases, can be used to shelter other income!