The Clash was stuck on whether they should stay or go now, and Madonna just wanted her papa to stop preaching so she could make up her mind. More recently, Benny Blanco, BTS, and Snoop Dogg pondered Bad Decisions. Life is full of tough choices, and deciding how to invest your hard-earned money can feel like one of them.
Stocks, mutual funds, bonds, Cabbage Patch Kids, precious metals, your cousin Vinny’s burgeoning legal empire, and commodities…. The choices can feel endless and overwhelming. But when you look at the details, one option rises to the top. Here are five reasons to choose real estate over other long-term investments. (Sorry, Vinny!)
Residential real estate investing allows you to use substantial leverage through financing your properties. With that leverage comes opportunities for higher returns on investment (ROI).
If you purchase a $250,000 home with 20% down, you control a quarter-million dollar asset for only a $50,000 initial expense. You collect the income and appreciation on the property’s total value without having to come up with that much cash. It allows you to reap the benefits of an extremely valuable asset without paying for its full value. It’s almost like receiving the dividends and growth on $250,000 in mutual funds while only investing $50,000.
That may sound too Madoff-y to be true, but in the case of real estate investment, that’s how the system works. Leverage allows you to purchase the high rents and appreciation of a higher-end property without actually using your funds to pay for the full value of the real estate.
Because real estate is one of the few investments you can easily and inexpensively leverage, it’s one of the best opportunities to make your investment dollars work most effectively.
2. History of Growth
Your property investment is in an asset class with a clear history of appreciation over the long term. You own something tangible, which means there is inherent value in it. People always require shelter.
While there may be some uneven patches in the upward trajectory, real estate prices have consistently risen over time, often more quickly than inflation and the stock market. That gives you a solid reason to believe your investment will grow. History shows people always want to own property.
The same can’t be true for other investments. The person who purchased the “Charlie bit my finger” NFT just has to hope that in a few years or a few decades, people still care about NFTs and about Charlie’s painful chomp. But as a real estate investor, you can rest easy knowing people always need places to live and that real estate is an asset class with a proven history of impressive growth.
Most investments, whether trading cards, equities, or anything in between, cost what they cost, and that’s the end of the story. You pay the asking price and hope it goes up before you want or need to sell. If it does, your net profit is the difference between the purchase and sales prices.
With real estate, not only does your investment bring in money while you own it, it can help save you money. That’s because your investment property falls under the IRS’s rules for businesses, so expenses associated with the property provide tax deductions. That can be everything from paying your property manager to replacing the furnace. You can also depreciate the structure’s value, providing a built-in tax hedge every year.
With 1031 exchanges, you can defer the tax liability on your appreciation essentially indefinitely as you continue to trade one appreciating property for the next. While you hold your property and wait for it to appreciate, you collect rent and save on your taxes.
4. Passive Income
In the height of the frenzy, sourcing a coveted Cabbage Patch Kid meant waiting in line for hours outside a Toys “R” Us. Maybe, just maybe, you’d be fortunate enough to snag one of those adorably puffy dolls that you then hoped might be worth something someday. Thankfully, real estate doesn’t require that level of effort while offering a highly uncertain return.
One of the best things about real estate investing is the passive income it generates. For very little of your time and effort, especially if you use a property manager, you receive significant monthly income just for letting someone else use your property. Your investment won’t be entire without work. Occasionally you will need to decide on what flooring to use for replacing worn carpet, or discuss the rent increase with your property manager. Still, real estate is a largely hands-off investment. Making money while giving up a little of your time is one benefit of owning a proper rental property.
5. Inflation Protection
With inflation being such a hot topic right now, this benefit of real estate investing is more relevant than ever. When buying a carton of eggs seems to cost nearly as much as a car payment, inflation stings. But when you are the one who owns the inflating asset, you benefit from price growth. If the price of everything is going up, your real estate portfolio is included in that “everything,” meaning your wealth grows thanks to inflation.
Because you are also selling the use of your property in the form of rent, you also see a nice bump in your monthly income as prices rise. Increasing rents help counteract the cost increases you see in everything else.
Choosing real estate over other long-term investments brings many benefits to your finances. Once you evaluate how owning rental property beats the competition, you see why adding real estate to your portfolio makes sense.