4 Reasons Why You Should Be Investing in Real Estate Today

When is the last time you checked your 410k or retirement account balance and earnings? Has it grown to your expectations? Growing up, I was taught the very basics of “save more than you spend” and also that putting money in a traditional retirement account for the long term was “the way” to have money for retirement. As my financial education has progressed and evolved, I subscribe to a much different ideology now.

What has changed?

As recently evidenced, the unpredictability and volatility of the stock market is not something I want to participate in any more. There has to be a better way that puts me in the driver’s seat. As you’ve probably guessed, you can take control of your retirement and savings by investing in real estate. You can participate either passively or actively, keep reading for more details and why you should start investing in real estate today!

First off, let’s clarify the difference between active and passive investing. Active investing can be defined as you, or a group of investors, finding a property, buying it, managing it and reaping the rewards. This is a “hands on” approach where you are making the major decisions relating to the property. It does take considerable time and effort in finding a good deal these days, as there is stiff competition for finding good properties (be it a commercial retail strip center, industrial building, or multifamily/apartment building). Finding favorable financing is also a piece of this puzzle. You can have a management and leasing company run the property for you and keep it occupied. This strategy can garner you the greatest rewards, but has more risk and involves more personal investment of time and education to maintain a smoothly run property.

Passive investing can be done a couple of different ways. You can participate in the bounties of real estate investing by purchasing stock in a wide variety of REITs (Real Estate Investment Trusts) that are traded on the stock exchange. You don’t get the same tax benefits of owning real estate this way, but it is a way of participating. There are also options to own via real estate syndications or partnering up with other investors. When investing through a syndication (a syndication is a group of investors who pool their money together to purchase a property) you can own a property, get great tax benefits and cash flow, and have limited exposure to liability. You also give up some control when investing this way as a “hands off” investor, but have no responsibilities for managing the property, finding the deal, arranging financing, etc.

What are the benefits of owning real estate?

Taxes and Depreciation

The tax benefits are outstanding, and aren’t talked about enough. The two main tax write off’s that you can utilize are depreciation and loan interest. Combined, these two “phantom expenses” make the income you receive virtually tax free. What I mean by “phantom expenses” are the expenses don’t really cost you money, but the IRS let’s you deduct a certain value of the building each year and the amount you pay in interest from the income you are taxed on. You aren’t paying anyone for this depreciation expense, but you have less of your income stream exposed to being taxed, thus keeping more of the money produced by the property.

A Hedge Against Inflation

A nice feature of having an income producing property is that when a tenant’s lease expires, you can adjust the rental rate to match the market rate. Depending on what stage of the economic cycle you’re in, as well as what city and neighborhood (market and submarket) the property is located in, generally speaking rents will increase year over year due to inflation. The annual increases in income insulate your property by the natural erosionary nature inflation has on the dollar.

Income and Appreciation

As I mentioned before, I have reservations of keeping my money trapped in my 401k or retirement account until I reach the age of retirement. When owning a property, there will be a cash flow produced every month that you get to enjoy. With proper tenants in place, and the likelihood of rental increases year over year - your property will also be appreciating (increasing) in value.

Leverage

Leverage can be employed in several different ways regarding investing. Financial leverage is commonly used to purchase a property via banks lending you up to 80% of the purchase price of a property. This has a phenomenal impact on the type of returns you get. For example, instead of coming up with the entire purchase price of a $1 million dollar property, you only need to provide $200,000. This puts many more properties within reach, and supercharges the amount of returns you can make from a property. Don’t listen to Dave Ramsey when he says, “all debt is bad”! Depending on your situation and assuming your other finances are in check, borrowing money to finance the purchase of an income producing property is a faster way to build wealth, versus waiting until you can pay all cash for a property. Your goal is to start as many income streams coming in as you can so you can enjoy it while you’re still young, right?!

In sum, there are so many positives to owning cash producing real estate. Your money isn’t safe in the volatile stock market. It only makes sense to educate yourself on the benefits of owning real estate, diversify your portfolio, and be on your path to financial freedom!