The last couple months have been marked by uncertainty and concern. Weary investors have watched hopelessly as the coronavirus pandemic wreaked havoc on our economy seemingly overnight. Tens of millions are already out of work, and the worst is likely yet to come.
However, with every challenge comes opportunity.
Today's blog post, Top 10 Reasons the Wealthy LOVE Real Estate, will serve as a helpful reminder of the Power of Real Estate Investments. The volatility and irrationality of the stock market's movements over the past two months have served as a stark reminder of why many astute investors look to real estate as their preferred investment vehicle over the stock market.
The classic investment advice that most Americans are typically given by financial advisors and the like is to follow the 80/20 rule: invest in 80% stocks and 20% bonds with adjustments as the investor ages and their risk profile changes.
However, the wealthy know better and don’t follow this “rule”. Unlike the average investor the wealthy keep only ~40% of their investments in the stock/bond markets, instead investing most of their money (60%!) in alternative investments like real estate. Here’s why they love it and why you should too:
1. Stability
Experienced investors love the safety & stability that Real Estate offers as an investment, and that dependability is especially true of income producing real estate, such as multifamily investments. Wealthy investors aren’t just looking to grow their wealth, they’re looking to preserve their wealth; and real estate is one of the best investments they can make to protect their principal.
That’s because multifamily investments are consistently far less volatile than the stock market, experiencing 300% fewer downturns since the Great Depression.
In fact, multifamily investments are one of the best performing assets to have during a recession as the demand for housing continues to grow year after year.
2. Leverage
Real Estate offers investors an excellent opportunity to leverage their investment through the use of fixed-rate long term debt. Banks love to lend on commercial real estate, often lending up to 70-80% of the purchase price, allowing investors to purchase larger properties with less capital.
In addition, these loans are typically non-recourse, meaning the borrower is not personally liable for the loan. This allows an attractive opportunity to maximize returns while simultaneously limiting the potential downside.
3. Tax Benefits
One of the better reasons to invest in real estate is the tremendous tax benefits available. The tax code is written to incentivize certain types of investments, and real estate is one of the biggest beneficiaries.
Investors profit from multiple pass-through tax benefits such as depreciation, deferral opportunities, and a number of expense related write-offs. In fact, often times an investor can realize a profit while still reporting a “paper loss”, thereby reducing their taxable income!
4. Scalability
A common entry point for real estate investors are single-family homes and small multi-family properties. However, they soon realize that these investments simply don’t scale, thus limiting the potential upside.
Conversely, commercial multifamily investments afford investors the opportunity to capitalize on the incredible economies of scale that they permit. The efficiency of a large apartment community provides cost savings in management, maintenance, and other expense categories that result in huge upside for investors.
5. Diversification
Real estate provides an excellent opportunity to investors looking to diversify their portfolio, especially if they’re heavily invested in the stock market.
Syndications allow investors to further diversify their real estate portfolios across multiple properties and asset classes. This prevents over exposure to any one property or asset class, making them a preferred investment vehicle for the wealthy investing in real estate.
6. Appreciation
With few exceptions, history shows that the value of real estate increases over time. When we look ahead, there’s no reason to believe this trend won’t continue.
The demand for housing continues to rise and new supply just can’t keep up. What’s more, many investments utilize a “value-add” strategy, meaning they make improvements to the property thereby increasing its value. This is often referred to as “forced appreciation” and can be a tremendously profitable strategy.
7. Passive Income
While some investors prefer to take a more active role, many love the passive opportunities available in real estate.
Working professionals often don’t want to invest the time and effort required to manage a rental property, which makes a syndication the perfect opportunity to invest in real estate without the headaches that come from toilets, tenants, and termites.
In a syndication, the sponsorship team takes care of all aspects of the management of the asset so the investor can simply sit back and collect their checks!
8. Cash Flow
For many, cash flow is one of the primary reasons to invest in real estate. Unlike most investments, real estate is an income producing asset allowing investors to realize profits throughout the lifetime of the investment, not just on the day of sale.
Cash flow provides a unique opportunity for investors to generate long term income that is 100% passive, while simultaneously growing the equity on their principal investment.
9. Inflation Protection
Real Estate is a physical asset, so it’s an excellent hedge against inflation for investors. Unlike some investments, real estate can actually benefit from inflation. As cost of living increases, rents go up, meaning greater income for the property. Inflation also increases the value of the property, adding to it’s appreciation. That’s why real estate is one of the best investments to fight inflation.
10. Equity
Real estate investments are self sustaining, so the income from the property is paying down the debt, thereby increasing the investors equity in the property with each payment. Generally, this equity is captured upon the sale of the property, but often times this equity can be captured through a strategic re-finance.
By refinancing a property and pulling out excess equity, investors are able to receive an equity distribution without incurring a taxable event, providing them tax free income. This is an extremely powerful tool that investors love.
So there you have it, ten incredible advantages to investing in real estate. Every single dollar invested in real estate benefits from every one of them. When people talk about "making their money work for them", this is exactly what they mean. If you want to be wealthy, then invest like the wealthy do and consider an investment in real estate.