In the countless conversations I have with new investors and others interested in real estate, a common question I’m asked is what makes real estate a superior investment to stocks, bonds, cryptocurrency, or any of the other popular investment vehicles. I wanted to take some time today to go over five of the main benefits of real estate investing. Although there are many additional benefits, these five are some of the primary reasons many of the most successful investors choose real estate as their preferred method of growing their wealth.
1. Diversification - Owning real estate is a great way to diversify an investment portfolio. The concept of diversification is often touted as paramount to a well-balanced and risk adjusted portfolio. Unfortunately, many investors only diversify within the stock market itself. They may include stocks from different industries, however this is the extent of their efforts. Real estate contains many different asset classes and exists in every market around the country (and the world). Investors can invest in different asset classes and geographical locations either directly or passively through a JV or syndication preventing over exposure to a certain area or segment of the market.
2. Passive Income - Many investors love the passive income they receive from their real estate investments. Although some take an active role in managing their investments, many real estate investors hire property managers, or invest in deals as a limited partner. This allows them to focus on other aspects of life such as work, family, or passion projects. Choosing the right investment vehicle can allow an investor to a completely passive role, yet still collect checks every month, or what some investors call “mailbox money”
3. Inflation Protection - Real estate is an excellent hedge against inflation. Over time property values and rents tend to increase. This means owners of real estate see their investments grow in value. As a general rule, real estate appreciation tends to outpace inflation allowing investors to retain the value of their investment dollars over time. Residential property investors using fixed rate 30 year mortgages for their Single Family Home Rentals often see their rent prices increase while their mortgages remain the same. Although taxes, insurance, and the cost of repairs will also go up over time, the mortgage of the property can stay the same and eventually end, allowing for an increase in profits year after year.
4. Stability - Real Estate tends to be more stable than stocks, bonds, or cryptocurrency, especially in the current age of high market volatility. Before the age of computers, the stock market tended to adjust much more slowly as the average investors only method of gaining knowledge of the market was to read the daily paper and call their broker on the telephone to make trades. Today, the market is controlled by computers and stock prices change every second. When bad news strikes, it can spread to millions of investors in a matter of minutes over the internet leading to extreme swings in stock prices. This volatility can be difficult to stomach. Real estate by comparison is very stable and doesn’t see such dramatic swings in value. Like any other part of the economy, real estate assets go up and down in value during the normal economic cycles, but it’s extremely unlikely that a real estate investor would find the value of his multi-family property cut in half in an hour, something that happens with more and more regularity in the stock market these days.
5. Tax Benefits - The tax code is written to highly favor real estate investors. The many tax benefits of real estate is one of the primary reasons why high earning W2 earners like doctors, lawyers, and software engineers tend to begin investing in real estate. Benefits like expense write-offs, depreciation, and cost-segregation analyses can all dramatically reduce one’s tax bill. Oftentimes high earning W2 workers who invest in real estate will report a “paper loss” on their taxes and use the loss to offset their W2 income thereby further reducing their tax burden.