From stocks, bonds, option contracts to tax lien certificates and real estate we all get to decide where to invest. With a plethora of investing opportunities and information at our fingertips it is worth understanding the investment strategy behind each option in order to make an educated decision. As investors, we have chosen real estate as our preferred investment vehicle and in this blog we share four reasons why this asset class is a strong candidate as your next investment.
1. Real estate is a tangible asset that has low volatility and generally appreciates
If you read the business section of the news on a weekly basis you will see many shocking stories on investing. The value of a given stock or cryptocurrency can explode or deplete overnight. While these stories might be entertaining to read, many investors question if their money is best invested in assets that are so volatile. Real estate on the other hand offers the opportunity to invest in a hard asset whose value does not change overnight. This asset class has inherent worth as a physical shelter and generally appreciates as historically seen.
2. Real estate provides cash flow and additional earnings through equity and appreciation
One of the biggest advantages of real estate is that it can be used to provide the investor with steady predicable cash flow. This means the investor is given a distribution from the properties income that can support him while never touching the principal balance invested. Additionally, real estate provides returns in the form of equity through debt paydown and through appreciation. These returns are provided to the investor when refinancing a property to increase leverage and of course as profit when selling. The return that is provided to the investor in the form of cash flow is commonly referred to as the cash-on-cash return. The profits realized during the sale of the property contribute to this cash return to create an overall return sometimes given as an average annual return or alternatively the internal rate of return (IRR) which takes into account the time value of money based on when the return is provided (i.e., portion given from cash flow versus profit at sale).
3. Real estate can be purchased with leverage
This is a topic that we will discuss in depth in a future article, but in short, one of the unique aspects of investing in real estate is that it can be purchased using leverage (debt). There are many advantages to this but the biggest is simply that by borrowing a portion of the money for a property at a low interest rate and then receiving a higher rate of return for that property results in a much higher return for the money you have put down on a real estate purchase. This also allows you to buy more real estate than you would otherwise be able to purchase with just cash, which provides economies of scale that reduces the risk of the investor and gives potential for cost savings.
4. Real estate profits can be protected from taxes
Typically, when you are provided returns in the forms on dividends on an investment you will have to pay taxes. In the world of real estate however, expense deductions, depreciation and cost segregation provide legal ways to save on taxes. Therefore, in addition to the higher returns that you typically see on real estate investments, you also get to keep a larger portion of those returns which results in your net returns being much larger than many other investments.