After 2 years studying Real Estate (RE), I came up with 7 reasons why real estate is a great investment. It is not that I think that RE is the best investment ever, but RE has certainly advantages over other types of investment. Let me break point out 7 great advantages of RE and break them down for you guys:
- It pays every month. Few types of investment pay every month. Stocks that pay dividends usually pay every quarter, half year or year. Interest bearing accounts typically pay you on a yearly basis. Investments with monthly payments are a great advantage: you can use the money earlier (in particular you can reinvest it all back and get interest on it). For the sake of discussion, let us say that your bank will let you put money on a interest-bearing account every month, but will only pay you the interest for the time the money was actually sitting there. So, if you have your money there for 1 entire year, you get the full rate (lets say 5% for the sake of discussion). For example, if you load the account in July, the money will be in the bank for 6 months, which will give you 5%/2 = 2.5%. Ok, now let us assume two different investments: a rental property and a subscription on an index fund that pays you at the end of the year. Both will pay you 12K net that year. In your rental property, you will get $1000 twelve times, whereas the fund dividends are payed altogether at the end of the year.If you decide to re-invest the money, the rental property will give you more at the end. How much? Well, it is actually simple. The first rent will give you 11/12 of 5%, the second rent will give you 10/12 and the penultimate last will give you 1/12 of 5%. This means that at the end, the 12K become $12275, so you made $275 more. Not exciting? Multiply that by your 10 rental properties, and all of a sudden you find yourself with another $2750.BTW, if you plan on living off interest, like I do, you need money every month. For me, this is one of the most interesting characteristics or RE.
- You can choose how passively you run your investment. Fully passively means hiring a property manager to do the work for you. Index funds are passive? Stocks are passive? I doubt they are that fully passive, but real estate can also be passive!
- Its tangible. You can touch it.
- This is probably the second best advantage of RE (at least for me) over the other investments. It allows huge levels of leverage. There is nothing like real estate when it comes to leverage. In particular, if you lease out one property for long periods, you can get a mortgage on a second property and provide the bank with the contract of the first rental property as an insurance. Also, you can generate cash flow out of nothing, as you can buy RE with leverage, rent it out for more than the mortgage installments and get money in your pocket every month. Essentially, you can make money out of thin air (when, you have to get your ass in the bank, look for a property and rent it out…). You can’t really do this with stocks (leverage is also possible in stocks, but it is not comparable).
- Appreciation. In the long run, the value of your properties goes up. In particular, as an investor, you can speculate on the value of properties on a given area. Speculation is not investment friendly? When you buy investment RE properties, appreciation is sort of a bonus (especially in Europe, where appreciation is way lower than in most parts in the US), i.e. you don’t do your math taking appreciation into account. So, for two exactly equal deals, speculate a bit: buy the property whose value you believe will increase more over time.
- Huge tax advantages in various countries, like Germany and the US.
- Its difficult to go to zero. While a company may file bankruptcy, the only way your RE goes to zero is with a natural disaster. However, you should have insurance covering you in case these events take place.