As you know, there are many different ways to invest and just as many differing opinions. I’m going to give you some reasons why I think real estate is a great investment.
1. I’ve never seen real estate go to Zero.
This isn’t to say that I’ve never seen real estate go down in value, but I’ve never seen it go completely belly up and ultimately be worth nothing. I can’t say this for stocks. I’ve seen stocks provide great returns, and I’ve seen stocks end up being worth nothing or very close to nothing. Real estate is something very tangible and they’re not making any more of it.
2. It’s all about control.
With real estate, I can own it AND control it. I get to make the decision about anything that goes on with the property. I choose who to rent to, who to sell to, and how to improve or not improve the property. Even though there may be a mortgage on it, the bank doesn’t have any ownership interest in the property. Where else can I put down 10% and control 100%?
3. The bank will loan me money to buy property.
Banks are more than eager to lend money for property. Just look at all the news about the sub-prime mortgages and such. Walk into a bank and ask to get a loan to buy stocks with and you’ll get a very different story. Banks don’t want to loan on stocks because they’re “risky”. They’ll loan on real estate all day long.
Now, I’m fully aware that are such things as margin accounts. With these accounts, you buy stocks “on margin” or with a loan. The important difference here is what’s called a “margin call”. Aside from the fee you pay for the margin account, if the value of your stocks drop below a certain threshold, you have to pay the difference or sell of the stock to make up the difference. As long as you’re current on a mortgage, you’ll never be forced to sell or make up a difference in value. A very important distinction.
4. The government subsidizes real estate investments.
You can write off mortgage interest, insurance costs, property taxes, utilities and other expenses associated with the investments. You’re also able to write off associated travel expenses. You can also claim depreciation as a deduction even though the property generally appreciates. This is a huge one. Take about 80% of the value of the property (you can’t depreciate the land, just the improvements on the land), and divide this amount by 27.5. On $100K, this would be $3,636 that you can deduct from your taxes. These are paper losses that will offset any positve cash flow making it essentially tax free for you. If you’re taking a loss on the property, you can write off your losses against your normal income up to a $25,000 loss.
Most of these advantages have no limits, whereas a 401K and an IRA have contribution and income limits.
5. Harness the power of leverage.
Many will argue that stocks return more in the long run. This may be true when you look at percentage return, but more important is “cash on cash return”. This is best explained with an example:
Buy $10K worth of stock and it goes up by 10%, you’ve earned $1,000.Now, put $10K down on a $100K property with a tenant paying all the holding expenses. If this property only appreciates 3%, you’ve got a $3,000 gain.
This is the power of leverage.
There are other reasons to own real estate and I’m sure I’ll get around to writing about it, but this will be all for now. Let me know what you think about all this…
Subscribe to Fiscal Musings | Digg This! | Stumble it!
by Living Almost Large, on April 7 2007 @ 1:15 pm
How’s this, RE is difficult to get into for $5k but mutual funds are not?
RE is difficult to carry if you are only saving $500/month because often carrying a mortgage, plus paying contractors, etc.
RE doesn’t have to go to zero for you to lose your shirt. You could lose your shirt with RE going down just 10%.
RE needs to make at least 10% for you to make a profit, with carrying costs, selling/buying closing costs, and paying a contractor.
Read Casey Serin’s Story, none of his home went to zero but he still lost his shirt. He thought he could flip homes in less than 2 months. Every month you carry a place you have to pay a mortgage. The risk is that if you carry and rent it out what if the tenants damage the place? What if they don’t pay rent and you have to evict?
There is risk in RE, like stocks, just a different sort. One big thing about RE is the amount of money needed as start up capital is a lot more than the stock market.
by frugal zeitgeist, on April 7 2007 @ 2:42 pm
I think RE has the potential to be hightly rewarding, but especially given the fallout from the RE bubble collapsing, the property has to produce income, and it’s a hell of a lot of work to be a landlord. That’s the part that many people (I’m not saying you) underestimate.
by limeade, on April 7 2007 @ 5:19 pm
I’m not really talking about flipping houses here. I’m talking about buying, holding, and netting a positive cash flow.
Sure there are a lot of what if’s but you can plan for those when you’re buying the property. If you think you can rent a place for $1,000 a month that’s $12K a year. Now factor in a reasonable vacancy rate of say 2 months. Now, you’ve got $10K to work with for the year. Factor in short and long term maintenance and average it over a year. Anything else you want to factor in, do it. Now you’re down to say $8K per year, that’s $666 per month to work with. Find a place where the principle, interest, taxes and insurance payments along with any other expenses like an HOA are less than $666.
The point here is that you have to do your homework, but you can factor in a lot of the “what if’s”. If the numbers don’t work for a particular property, then don’t buy it.
Just saying that it’s “risky” and what if all the time is another way of saying “I can’t”. I don’t like to say I can’t. I prefer asking “How can I?”.
by Tiredbuthappy, on April 7 2007 @ 6:34 pm
Interesting post and comments. I’d love to get into real estate investing but I’m very aware of how much I don’t know, and of how impulsive I can be. Plus I don’t have tens of thousands of dollars sitting around gathering dust. What I need is a partner/mentor, but the idea of trusting someone enough to go into business together is a little scary.
Oh well. Maybe some day. Probably I’ll get into it by simply not selling my current house when and if we ever relocated.
by Fiscal Musings » Blog Archive » Why I Like Real Estate, Part I: Control, on January 30 2008 @ 7:05 am
[…] is a bad investment and too risky. I don’t really agree with all of this and still have many reasons to like real estate, which I’ll review here over a series of […]