Why Investment Real Estate? My Top 5 Reasons - Houston, TX

[Tim LaBorde]

1) Tax Advantages - Income from Real Estate provides the ability to make money at lower effective tax rates through the use of depreciation and loopholes that a regular employee does not have access to. If I'm working at a lower tax rate it's the same as getting a raise for working the same amount of hours. Work smarter, not harder! Verify this with your own tax adviser as everyone's tax situation is different.

2) Diversify Your Portfolio - "Don't put all your eggs in one basket." Our economy is still recovering from the last round of damage caused by Wall Street. From Gordon Gekko to Bernie Sanders to The Wolf of Wall Street, Main Street has continued to cry foul and yet bonuses are as big as ever, even after the taxpayers bailed out the banks. Take some of your money and diversify it into assets that are not managed by bankers. Mutual funds don't get paid to advise you to put money into a single family home close by and flip it or rent it out, so they're never going to mention it to you.

3) More Control Over Your Asset - Real Estate allows you to be your own property manager or pick one you trust. You choose which property you want, which lender to use, which contractor will fix it up, where the rehab materials will be bought from, what the finished product will look like, how to screen the tenants and who the tenants will be, how much cash flow you will make, and on and on. This beats a CEO with his own personal corporate jet bought by shareholders' money any day.

4) Forced Appreciation - When you buy $100k worth of stock, the only thing you might be able to do to personally raise the stock price is write the company's board a letter telling them to work harder and hope for the best. When you buy a $100k house, what's that worth? Maybe it's $100k or maybe you know that you can add a pool and a garage and turn $100k into $200k. The point is that you can dramatically raise the property's value through rehab and upgrades by using your own knowledge and relying on your team of experts.

5) Risk Management Through Leverage - Let's say you use the $100k in your bank account to buy a property and the repairs are not as easy as expected or it takes you longer than you thought it would to sell it. All of your money is tied up into one sinking ship. Now instead of doing that, you take advantage of the loan products out there and buy 3 properties with $30k down put into each and you finance the balance. Lenders love making loans on real estate because it's a tangible product that they can foreclose on if you don't do what you're supposed to do. That means money at long-term rates for you that are cheaper than the margin rates on a stock. It also means better returns.

Consider this example: You put $100k into one property that cash flows $9,600/year. The return would be $9,600/$100,000 = 9.6%. That's much better than the 0.1% banks are offering to have you keep your money in a savings account. Now consider if you put $30k down, financed $70k, and cash flowed $5,100 (reduced to include debt service). $5,100 cash flow / $30k down payment = 17%/year. This is a very realistic example of how leverage, when added to your education and experience, can increase your return and lower your risk simultaneously... all while giving you much more control over your asset than you would have had if you kept it just in stocks/bonds/mutual funds alone.