Why Invest in Real Estate

With the stock market in an unstable condition and the real estate market having taken a hit in the Denver area, you may ask, “Why should I invest in real estate?” There are three very good reasons:

LEVERAGE:

Some financial advisors say that real estate is a poor investment because normally it appreciates only 3% a year. What they fail to take into account is the value of leverage. Based on history, both the real estate market and the stock market should recover in the next couple of years. If both start appreciating at only 3% per year and you invest $10,000; after 5 years your stock market portfolio would have given a net yield of $1.592.74.

If instead, you would have invested in a rental property worth $100,000 using the $10,000 as a down payment (which by he way is still possible today), you could have a net gain of $20,464.21. The net appreciation alone would be $15,927.41. (Note: See breakdown of Assumptions on Report at bottom). This is accomplished by leveraging OPM (Other People’s Money) meaning the lender and the renter and OPT (Other People’s Time) meaning the Property Manager. Try doing that with a stock portfolio!

Now, try getting a loan to purchase more stock using the portfolio as security. With real estate it is possible to borrow against the appreciated property to purchase additional properties. That brings us to the next benefit of investing in real estate.

TAX ADVANTAGES:

When you sell part of your stock portfolio to purchase some new stock you will need to pay capital gain taxes on that gain. With real estate you may not even need to sell a house to purchase the next one. You can take a line of credit on the appreciated value of your first house to use for the down payment of your second. If you need to sell your first property to purchase the next investment property then you can take advantage of a §1031 exchange to shield you from paying taxes on the capital gains. Although this vehicle has restrictions, it is commonly used for this purpose.

The tax code also allows you to depreciate the property you hold for investment purposes. In a nutshell, this means you can have a negative cash flow before taxes but a positive cash flow after taxes.

A real estate tax specialist and §1031 specialist can walk you through the proper steps and requirements to take advantage of these provisions.

LESS RISK:

Even though you can’t insure against market fluctuations, you can insure your house for unforeseen catastrophes. Your money, in the right bank, is insured by the federal government, up to a certain amount. You have more control to protect your real estate investment than any other. Not only can you insure it, but you can protect it through repairs and maintenance and proper management.

Even though you cannot control market fluctuations, Real estate has been more stable in the Denver area than many investments. For most of the last 25 years we have seen an average of 6% appreciation.

In addition, we have the ability to increase the value of our property with a minimum of investment. For example, expanding a one car garage or carport to a 2 car garage can more than pay for your additional investment. Another example is adding 1-2 bedrooms to a college rental which can significantly increase your rental income as well as the property value.

In summary, if you find the right property, for the right price, in the right place; it will be great investment.