When I tell some of my friends that I’m a real estate investor during these ‘tough’ economic times, they tell me I’m crazy. They’ll say, “Tom, haven’t you seen the news? Now is a terrible time to be in real estate. The market is horrible.” Well, if I’m going to buy a suit or shoes or even a car, I’m going to want to pick it up at the biggest discount possible. And right now, the real estate is for sale! Doesn’t that make it the perfect time to get involved?
So for those of you lucky enough to have money, the big question is what should you do with your money? The obvious answer: DO NOT put it in a bank! Why earn 2% when inflation is over 5%? The safest bet is to invest in assets that generate income. There are many types of investments that you can focus on: gold, silver, currencies, stocks, etc… But right now, for this economy, investing in real estate is ideal for me. Because?
First, if purchased correctly, you should be able to generate consistent monthly income. Can this be done with other investments? If you buy gold bars and give it to someone else to keep for 1 year, will they pay you monthly to keep it? Probably not. If you provide housing for someone for an entire year, will they pay you a higher monthly stipend than you have to live on your property? Absolutely!
When buying real estate, you should always calculate if you can generate positive cash flow on a monthly basis. If you buy real estate for equity alone and the market changes, you lose your equity. Add your inability to cash flow into the equation, and you have investors shying away from higher foreclosure properties and rates. Sounds like a situation a lot of people in this economy find themselves in! However, if you buy real estate for the cash flow and lose your equity, well, you’re still getting a monthly cash flow, so you can be patient and wait for the market to appreciate again.
This brings us to the second reason to invest: appreciation. Since 1968, home values have been steadily appreciating at a rate of approximately 6.34% per year! Sure, some years have been better than others, but for the past 40 years, home values have been rising steadily. I think of my parents’ house in Nebraska, which they bought in 1983 for about $50,000. When they sold it 20 years later, there was more than double its value! Ask anyone who has been living in their home for more than 20 years and they will tell you similar increases in value.
Think about the financial advantages of buying a property, keeping it for 20 years, and doubling in value in that time period. Wouldn’t that investment be worth it? Now imagine if you have tenants living on the property, paying your mortgage and bringing you an extra couple hundred bucks a month while it appreciates. Isn’t that even better?
If you have a 401k and contribute for 20 years, the amount will grow significantly. But who is paying for your 401k as it grows in value? You are. And who pays your rent while it appreciates? Your tenant! Which retirement plan sounds more secure for your future, Social Security, investing in the stock market, or investing in multiple properties? It’s a no brainer!
Now my favorite reason to invest in real estate: leverage. Let’s take a look at how you can take advantage of the banks’ leverage to increase your net worth with real estate instead of investing in the stock market. Let’s say you have $100,000 to invest and you’re trying to decide between investing in the stock market or real estate. If you invested $100,000 in the stock market, how much value could you receive? Well, $100,000 in stock. But what happens if you invest $100,000 in commercial property? How much value could you receive? In many cases, you could invest $100,000 in a $1,000,000 property and tap into a financial institution to get the remaining $900,000. (Try going to a bank and telling them you’re willing to make a 10% down payment if they’ll finance the remaining 90% of Berkshire Hathaway’s stock. They’ll laugh you off the bank.) receiving the benefit only in that increment. But as the value of real estate increases, you benefit by a much larger percentage.
To clarify, let’s review an example. Let’s say both the stock you want to invest in and the property you want to invest in both had a great year and doubled in value. How would each scenario turn out?
In the stock scenario, if your $100,000 investment were to double, you would have $200,000. And to take full advantage of this windfall of funds, you would have to sell your shares and receive a pre-tax gain of $100,000. Nothing bad.
In the real estate scenario, if the value of your property doubles, then your $100,000 investment will have earned you $2,000,000! Remember, it is the value of the property that doubled, not your investment. And unlike the stock example, you wouldn’t necessarily have to sell to take advantage of your windfall. Let’s say you decide to refinance at 70% loan to value. You would have ($2K x 70% minus $900,000 loan repayment and $100,000 initial investment) $400,000 in profit minus fees. And is this income taxed? No! So you could keep it all.
And what to do with $400,000? Well, why not invest in another $4 million worth of commercial property? Now, between the 2 transactions, you would have already amassed a net worth of $6 million dollars through real estate compared to $200,000 through the stock market!
In summary, the main reasons why investing in real estate right now is better than any other type of investment is that it generates consistently, has a history of appreciating value, great tax advantages, and you can take advantage of financial institutions to help you finance. your offers