In my opinion, there is no better investment than real estate. Stocks and bonds are great and have been shown to offer solid returns over time, but there is one thing that I don’t like about stocks, lack of control. With real estate I can get just as good if not better returns and I’m not relying on sources out of my control to determine my ROI. With real estate, I can take control of an asset and add value right away by making improvements to the property or by increasing the rents it brings in by taking over a mismanaged asset. Not only this, but there are a multitude of ways real estate increases wealth that can be just as passive as investing in stocks. To be clear, these four examples are referring to rental properties in particular. Flips and wholesaling make you quick money but rental properties offer all of these long term wealth generators, which make rentals my go to real estate investment strategy.
1) Cash Flow: Income-expenses=cash flow. Cash flow is the money in your pocket at the end of the month after all of the property expenses have been paid. This is probably the most commonly known wealth generator of real estate. If you buy a rental property correctly, it should be cash flowing positively and giving you a steady stream of cash coming in each and every month.
2) Appreciation: It is a known fact that home values have historically increased over time at around 3% per year. Of course there are ups and downs just like the stock market, but over the course of many years the average has been around 3%. I like to treat appreciation as icing on the cake. I don’t buy based on hoping appreciation happens, but it is a very nice bonus to know that the value of my assets are going up steadily over time. Of course there is also the concept of “forced appreciation” which is increasing the value of the home by making improvements to the property. This is a way to increase the value of a home much more quickly.
3) Loan Paydown: What better way is there to pay for something than to have someone pay it for you! This is essentially what is happening when you own a rental property. Assuming you have a 30 year mortgage, every month the income from the property is being used to pay down that loan. Over time, you will have a free and clear asset paid for entirely by the tenants! All without having to put any of your own money towards the mortgage payments. It doesn’t get any better than that!
4) Tax Benefits: There are a plethora of tax benefits that come along with owning real estate. To start, you get to deduct mortgage interest payments (paid for by your tenants) to offset your rental income. Repairs you make on the property are also deductible. Then there is the magical concept of depreciation. The IRS lets you deduct a portion of your property every year because they treat it as your property decreasing in value over time due to wear and tear, deterioration, and age. While in reality, your property is more than likely increasing in market value. All of these deductions offset your rental income and sometimes even put your property at a negative profit on paper, so you actually won’t have to pay any taxes on your income that you put in your pocket every month. Not to mention there is also the powerful “1031 Exchange” available to investors which I’ll detail in a later post.
As you can see, investing in real estate can be a pretty powerful strategy to sky rocket your net wealth over time. Taking all of these into account, if you buy a property right the ROI is through the roof. In my opinion, it is tough for stocks to compete with a good real estate deal. Keep all of these in mind when you decide where to invest your money in Beaver County, Allegheny County, or Butler County!