I’m biased. I love helping other people buy and sell real estate as much as I enjoy buying and selling it for myself. My husband and I own nine properties right now. One is the home we live in and a second is a home which we do not rent. The others are long-term rental properties. This past weekend, we decided to list our second home and trade up to another home in the same neighborhood. It’s always fun when I get to be the client.
We enjoy investing in real estate for all the reasons I’ve listed below. While the stock market has appreciated more than real estate over time, don’t let that fool you into thinking it’s a better investment. The best real estate investments can potentially provide higher returns than the stock market for the following reasons.
Leverage
Real estate allows investors to use leverage, which means they can control a valuable asset by putting down only a fraction of the total cost as a down payment. This leverage can amplify returns. For example, if you put down a 20% down payment on a $500,000 property and it appreciates by 5%, your $100,000 investment has gained $25,000 in value, which is a 25% return on your initial investment.
After owning leveraged real estate during the downturn, I personally forgo the higher returns with leverage for the security of being debt-free. This is a personal decision.
Real Estate Cash Flow
Unlike stocks, which provide returns primarily through price appreciation, real estate investments can generate ongoing cash flow in the form of rental income. This cash flow can be used to offset the costs of ownership and provide a steady stream of income. Essentially, cash flow from real estate is what is going to fund my retirement.
Tax Benefits of Real Estate Investing
Real estate investors can take advantage of various tax deductions, such as mortgage interest, depreciation, and operating expenses, which can reduce their overall tax burden and increase their effective returns. In addition, the 1031 Exchange allows you to defer capital gains by swapping one property for another. There is a lot of flexibility in this IRS Rule, allowing you to swap vacant land for a single-family home, etc. The trick is that it must be an investment property, not your full-time home.
Inflation Hedge
Real estate values tend to appreciate over time, keeping pace with or even outpacing inflation. This makes real estate a potential hedge against inflation, as rents and property values typically rise along with the overall price level. Here is a personal example: The rent on one of our properties has increased by $1,000/month over the past eight years.
Supply and Demand
Land and desirable properties are finite resources, which can create scarcity and drive up prices in areas with strong demand. This scarcity can contribute to higher long-term returns for real estate investments. Let’s face it, there is a finite amount of ski-in/ski-out properties not only in Park City but around the world. There is a finite amount of land in Park City. It is almost completely built out.
Value-Add Real Estate Opportunities
Real estate investors can often improve the value of their properties through renovations, upgrades, or more efficient management, creating opportunities for higher returns. This, in my opinion, is the biggest differentiator between owning real estate and stocks. While I can’t control the price of an Amazon share, I can paint and stage my property before renting or selling it.
Real Estate vs Stocks Risks
As a reminder, real estate, like stocks, carries risks. The US stock and real estate markets have trended up in value over time. However, as we saw in 2008, these assets can also go down. The trick is that you need to be in a position where you are not forced to sell when these assets have a lower valuation. This is where being over-leveraged will increase risk. Additionally, investment returns will vary based on factors such as the location and property type. Careful due diligence is necessary to understand what you are buying and the risks involved to achieve the best returns.
Other risks in owning investment real estate include potential vacancies, maintenance costs, HOA assessments, and the illiquid nature of real estate. While our properties sell quickly, they typically don’t sell in a day, like stocks.
While I am well-versed in buying and selling real estate, the truth is that I know very little about investing in the stock market. This is the reason why we pay a tenured and trusted professional for advice. Diversification and trusted advisors are the keys to mitigating risks and maximizing returns.