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"Buy land, they're not making it anymore."
Mark Twain
CHOOSING THE VEHICLE
When it comes to deciding on the right investment vehicle, there are many options that come to mind. Stocks, bonds, mutual funds, annuities, collectibles and high-interest saving accounts are just a few of the many choices and each come with their unique features, advantages and disadvantages. Even though a well-diversified portfolio should include multiple asset classes, there are some undisputable benefits that real estate investments provide, that no other investment class can compete with.
Andrew Carnegie is known to have said “Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.”
THE BENEFITS
Nine Benefits of Real Estate Investing
1. Leverage
Leverage in real estate is using borrowed money to buy a property. This allows you to maximize your returns by putting less cash into each property investment and make more money using other people’s money. You also get to enjoy all of the tax incentives and other benefits that owning real estate offers, even on the portion that you didn’t even pay for. This accelerates the wealth building process and can help you achieve your investment goals earlier.
2. Safer Debt
Investing with debt is risky but the risk of taking on debt is much less with real estate than with other investment classes. Investing in stocks with debt, known as margin, is extremely risky and must only be used by experienced traders.
3. Tax benefits
Real estate has some great tax benefits that some of the other investment options out there lack. While passive real estate income is taxed at a much lower rate than other profits, as an investor, you can also take advantage of many deductions that you are entitled to as a real estate investor. Tax write-offs, depreciation, 1031 exchange, long-term and short-term capital gains are just a few of the incentives that contribute to the wealth-building nature of a real estate investment, allowing you to keep a greater percentage of your profits.
4. Hedge against inflation
Real estate ownership is commonly considered a hedge against inflation, as property values and rental incomes naturally increase with inflation, even more so than other asset classes.
5. Reduced Volatility
Real estate investment properties usually experience less market volatility than other investment categories. This protects you, as the investor, from much of the stress that volatility creates, and allows you to make clear investment decisions without emotions and fear delaying your growth.
6. Easier to understand
While the acquiring a property can be complex, arduous and overwhelming, the basic concept is simple. Buy a property, manage the day-to-day upkeep and attempt to sell at a profit. This makes real estate so attractive to investors all around.
7. Cashflow
A key characteristic of real estate is its ability to produce a constant flow of income. In many cases, your cashflow will even multiply over time as you pay down your mortgage and build up your equity.
8. Appreciation
Real estate valuations tend to increase over time, and with a good real estate investment, you can profit when it's time to sell. Rents also tend to rise over time, leading to higher cashflow.
This chart from the Federal Reserve Bank of St. Louis shows the steady growth of home prices in the U.S. over many years.
9. Portfolio Diversification
Another benefit of investing in real estate is its diversification potential. With many sub-categories to choose from, the possibilities are endless. Real estate also has a low, and in some cases negative, correlation with other asset classes. This means that adding real estate to a portfolio can lower volatility and provide a higher return per unit of risk. Real estate can also be used as a hedge against other, riskier investments.
CONCLUSION
Despite all the benefits of investing in real estate, there are some disadvantages too. One of the main ones being the lack of liquidity. Unlike a stock or bond transaction which can be executed in an instant, a real estate transaction can take a long time to finalize. Even with the help of an agent or broker, it can take a few weeks, and sometimes months of work just to get over the finish line and extract your equity. Real estate’s higher barrier to entry as opposed to other investments is another reason that many investors refrain from partaking in it.
Overall, it is difficult to calculate returns of one asset class against another because of factors like inflation and other differentiating variables that each asset class has. Real estate too, has its own features like being able to refinance tax free, compound returns by reinvesting cashflow and other unique attributes that make it almost impossible to measure alongside other investments. That being said, it is safe to say, that for many decades, real estate has produced superior returns for those fortunate enough to participate in it. It is with good cause that Robert G. Allen said "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." With the now lower barrier to entry, Bridgehall Group provides you with access to high-quality real estate investment opportunities that were, until now, exclusive to the wealthy and institutional investors.
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