Many Americans looking to grow their future wealth understandably struggle to choose between real estate and building a portfolio of stocks. Ideally, you will desire to diversify your income by owning both real estate and stocks. However, this is not always the option for most potential investors.
Whereas it is easier to trade stocks, investing in real estate can provide fantastic returns via rental income, tax benefits, and witty strategies. Furthermore, real estate investment has unique qualities that make it more attractive than stocks. That in mind, let us dive into critical reasons why you should invest in real estate over to stocks.
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Critical Reasons Why You Should Invest in Real Estate Over Stocks
» Real Estate Gives You More Control of Investment
Nobody cares about your investment more than you. Investing in real estate puts you in charge of critical decisions regarding your investment. You can modify your properties to elevate their value, find better tenants, raise rents, cut expenses, and market accordingly.
Whereas real estate does not shield you from economic cycles, overall, it gives you the leeway to make profitable decisions. You can own up your mistakes, learn valuable lessons from experiences, and make informed adjustments that will elevate your investment success.
But when you invest in stocks, you become a minority investor who puts their faith in the company’s management. Sometimes company management commits fraud or brings down the company through unwise decisions.
» Real Estate is More Stable Vs. Stock
Timing the stock market is a losing game that even professionals strive to avoid. But the case is different in real estate, where investors can time the market and possibly drive incredible profits for their businesses.
Real estate is more stable and relatively predictable than stock. Whereas the real estate may see significant fluctuation over the long-run, daily changes are common in the stock market. A tweet from the presidency can cause a selloff in stocks but does not cause a dip in real estate rates.
The volatility in stock markets makes it hard for investors to keep focused and stay on course. Contrast that with real estate where pricing forces occur gradually, and not forgetting that real estate is a less liquid asset that takes more time and effort to sell. You are likely to hold on to real estate through market cycles, getting sufficient time to make informed decisions that will secure their investment.
Something else about real estate is that cash flow keeps pace with inflation. As the cost of living grows, so does the market price for rental properties. Contrarily, stocks lack an inflation-adjustment mechanism.
You can also generate incredible profits by buying a foreclosed or distressed property below the market value. Then you can rehabilitate the property and sell it a few months later at a price way higher than the purchase, renovation, and transaction costs.
» Guaranteed Return on Investment
The stock market makes money by buying low and selling high. But most investors cannot do so consistently. And you cannot possibly be fully conversant with a particular organization, its competitors, management, etc. Furthermore, as an individual investor, you will always have lower leverage than institutional buyers.
But in real estate, you are assured of positive ROI provided you do your business right. You are dealing with individual properties that vary in features, location, size, and other criteria. By offering what your potential customers are looking for in residential or commercial properties, you can elevate your real estate investment returns.
You can always leverage strategies where you buy low and sell high to score higher ROI, for example, after renovating an old house. You can also target particular geographical pockets with a guarantee for remarkable profits, as long as you know the housing type in demand.
» You can Leverage Real Estate.
You do not need 100% of your money to own a rental property. That is the power of leverage where you use other people’s money to generate more income for you. Obtaining a mortgage gives you the leverage that you can use to develop more properties, thus increasing your returns and spreading risks.
With leverage, you control an income-generating asset worth several times your cash investment. When you sell the property, you make money on the full value of the investment. In contrast, the stock market requires investors to pay 100% of their money to control their investments fully.
Let us illustrate the power of leverage in real estate by considering two situations. Person A buys a $200,000 investment property outright. After management fees, insurance, and taxes, the property generates a cash flow of $1000 monthly. The investor makes $12,000 annually, a 6% return on investment.
Person B invests $40,000 into five properties. After the mortgage and other expenses, the properties generate $2,000 monthly. The investor earns $24,000 per year, a 12% ROI. By harnessing leverage and diversification, investor B makes more money and controls properties worth $1,000,000 worth of real estate, compared to only $200,000.
Even as you tap into leverage, make the right decisions to keep the cash-flow positive. Let leverage not get into your head. It is a tool that needs to be managed carefully, as being overleverage increases your risks significantly.
» Unique Tax Benefits
Real estate comes with incredible tax advantages.
Among the most potent tax benefit of investing in real estate is the depreciation deduction. The IRS allows you to deduct your property’s cost over 27.5 years (for residential property) or 39 years (for commercial property).
For instance, if your rental property is valued at $400,000, you would divide that by 27.5 years. Now, you can deduct approximately $14600 as a depreciation expense annually for 27.5 years. The deduction allows you to report lesser profits to the IRS, reducing the amount of taxes you owe to the government. Real estate investors love about this deduction because they are depreciating an asset that does not often lose value.
The mortgage interest deduction can also offer you significant tax benefits. It allows you to deduct the interest you pay on the loan you used to build your property.
Let us assume you purchased a property for $340,000 with a $270,000 loan, and the interest payable in the first year amounts to $20,000. Should you have a rental income of $42,000, deducting $20,000 mortgage interest reduces your taxable rental income to $22,000. That is an incredible difference!
You are also eligible for the exemption from capital exclusion tax benefit if you have owned and lived in a residential property for two of the last five-year period before selling it.
Investors can also claim a deduction for the ordinary expenses they incur when running their rental property, including management and legal fees, maintenance, and regular repairs. Stocks do not offer such tax-free benefits.
Real estate gives investors a rare opportunity to save on taxes and increase their returns simultaneously. And while the Wall Street continually become a game of financiers and a mystery to most investors, real estate holds good tidings for the average American’s future. But a wealth of knowledge, comprehensive research, and strategic decision-making is critical to success in this industry.
If you want to know more about Real estate investment secrets, contact RTI Bridge Loans at (562) 857-2285. We are always available as a Speaker and Consultant.