Introduction to the Benefits:

I am a big proponent of investing in real estate to not only preserve wealth (as most wealthy people do today) but also to create it in the first place.  Most people think of investors as people who put money into the stock market. That’s not all bad if you know what are doing and you have time to weather the market’s ups and downs.  However, the main group of people who consistently make money in the stock market are the brokers and the people running all the funds.  If you don’t watch out, the fees associated with many of the stock market vehicles will chew up your profits and taxes will get the rest.  It is an unhappy statistic that median retirement savings of families between the ages of 56 and 61 is a mere $17,000[i]. Many of these retirement-age families have no savings at all. My goal is to show you some distinct advantages about using real estate as a significant part of your retirement planning.

This is not to say that real estate is a perfect investment.  Every investment has risks and real estate is no different.  However, there are ways to control your risks in several different ways and we’ll discuss that some of them here.  Overall, I believe that real estate is a superior alternative to invest in the stock market for most people.  The government wants to encourage people to invest in housing because everybody needs a place to live and many people cannot afford to buy their own home.  If you decide to become a real estate investor who buys houses or apartments to read them out to others, the provided invaluable service and the government will reward you with tax incentives of various kinds.  This is even more important in 2018 with the Trump tax deal when many of the tax benefits given to W2 employees are being phased out while benefits to small business owners are being increased. It makes sense to shift your behavior to accommodate the new tax code and investing in real estate can help you make that shirt.

Real estate offers people the opportunity to make chunks of cash in single deals and to create streams of cash over time. People understand real estate, sometimes better than the stock market, and they have a tangible asset that, when insured property, will never go to zero like some stocks can. For my time, effort and money, here are the things that I like most about real estate investing and which I think offer a unique advantage over what Wall Street has to offer.

Advantage number one: Cash Flow

I have already alluded to cash flow as one advantage of real estate investing.  It is perhaps the best known of all the advantages I will discuss.  Nearly everyone is familiar with the concept of buying a rental property to enjoy the income that it can produce.  However, many people think that owning a property means managing it as well. With good reason they are reluctant to sign up to be a landlord and start taking calls in the middle of the night for a stopped up toilet or broken pipe.

The key owning rental property is to create a system that allows you to manage the property managers who manage your properties. Then it can be very nearly passive and you can make money whether you are working sleeping or flying around the world. Good property managers are worth worth their weight in gold and if they charge you 10% of the rent in order to keep you your life trouble free, that is a bargain.  I have a guest house in back of my property that I am using personally for an Airbnb rental. This little corner of property has created about $1300 a month of positive cash flow for me and my family. I am now showing my wife how to hire help and run this like a business so we can take on other properties without having to run ourselves ragged.

Passive income sounds great right off the top, but as one of my mentors, Matt Theriault, is fond of saying, building cash flow makes a lot more sense for building wealth than the traditional approach. Most people spend a lifetime trying to build up enough cash for retirement and most fall short. A diligent real estate investor can build up enough income from rental property to support them in retirement in as little as 3 years. Some people I know with modest needs have done it even sooner. Compare that to working 40 years to build up a 401(k) that will be taxed as regular income once you start taking it out. And most people are not building enough wealth from their 401(k) retirement plans to be considered financially independent, let alone wealthy. Using real estate to build a cash-flowing portfolio makes sense and I think it it is the easiest way to create a secure nest egg.

Advantage #2: Appreciation

(or Inflation Hedge)

If you Google “advantages of investing in real estate”, you will probably find a list at the top of the page that lists appreciation and inflation hedge as two separate benefits. I think that is two different ways to look at the same thing. Since 1968, the US Census Bureau says that the price of existing homes has increased by 5.4%. Since the hyper-inflationary decades of the 70’s and 80’s, the rate of inflation has per decade has hovered from a high of 3.08% to a low of 1.87 from 2010 – 2015. The long term average since 1930 is 3.18%. When you take taxes into account the true number is significantly higher and can actually wipe out any appreciation gains that you might expect from holding real estate. Still, real estate will hold its own as an inflation hedge and the other ways of profiting from real estate will push your earnings up well beyond what you would typically earn from appreciation alone.

A word of caution to neophytes, you should never invest in a real estate deal that only works if you have appreciation. If it doesn’t stand on its own without appreciation then it is not a good enough deal and you should look for something better (see Arbitrage below).

Advantage #3: Depreciation/Tax Benefits

Depreciation sounds like a bad thing and in some cases it is. If you buy a new car, depreciation is instant and substantial when you drive it off of the lot. But with real estate, depreciation is good because the government will allow you to write off gains in your real estate business against “paper losses” accrued by holding real property. In fact, they will let you depreciate the improvements on a property (not the land) as if it had a finite life and the building will be worth nothing over a certain period of time. Even though the property may actually be gaining value through appreciation/inflation, you can write off losses for the building as if it were decreasing in value. You need to get the specifics from your accountant or tax attorney but this can be a big benefit when buying and holding real estate. Depreciation is a major benefit but there are other tax benefits from owning real property. You have real expenses in running the property including property tax. You can also deduct mortgage interest. This is the cost of not having to come up with all the money to buying your investment and the cost is deductible. You can even deduct the cost of travel to see your property. So if you like to travel to Las Vegas or New York, consider buying property there and you can deduct your travel expenses. Always, consult your tax professional to figure out how these benefits may apply to you.

Advantage #4: Arbitrage

(AKA, making money when you buy)

Arbitrage is simple the buying of an asset at a lower price and then selling the same asset at a higher price. Comparing a real estate purchase to a stock market transaction is illustrative. If you wanted to buy 100 shares of Google at the time of this writing, it would cost you about $107,539. If you thought that was too much to pay and went looking for a motivated seller who would sell it to you at a discount, you’d have trouble. In fact, people might think you’re a little bit looney to try that. But real estate investors find deals like this all the time. Motivated sellers have a problem continuing to own their house and they are willing to give up the equity that they have in order for someone to make that problem go away. Maybe they can’t make the payment on the mortgage or the taxes. Maybe the house is empty and needs a lot of work to make it livable. Maybe they are just tired of being a landlord and they would like someone to cash them out quickly. This is the kind of deal that happens all the time in real estate. Maybe only 5% or less of the deals in a given market are done significantly below market value but that is what investors look for and that his how they provide value. In fact, you may have heard the term “you make money when you buy”. This is derived from the core value of arbitrage in real estate. Again, if you can’t find a deal where you can buy at a discount to market value, you should probably keep on looking because deals like that are out there.

What We’ve Covered So Far:

So far we have covered four of the big benefits of investing in real estate:

1. Cash Flow
2. Appreciation
3. Depreciation
4. Arbitrage

In my next post I will cover the final three benefits, Leverage, Loan Pay Down and Control. I hope you enjoyed this subject as much as I do. Real estate is one of the last ways that people can build wealth and the landscape is changing. The market is still good but time will tell if the Internet pressure that squeezed out so many traditional companies (iTunes vs. record labels, Netflix vs. Blockbuster and Amazon vs. the world) will put a similar squeeze on the real estate market. So we will consider this question later and for now we will hold off until we have covered the next three benefits of investing in real estate. Thanks for reading and please comment below.

God bless your success,
Gary

[i] https://www.cnbc.com/2017/04/07/how-much-the-average-family-has-saved-for-retirement-at-every-age.html