Why I Invest In Real Estate
Real estate is an asset class that you have without a doubt heard of. You have probably even heard of the phrase that 90% of the world’s millionaires became that way through real estate. Well, if that sentence isn’t motivation enough for you then I don’t know what will be. The point of this article is to take a high-level look at why I invest in real estate.
Before getting too far, I think it is important to look at some of the different types of real estate investments.
Types of Real Estate Investments
There are many types of real estate investments, here are just a few:
• Single Family Homes
• Multi-Family Homes (2-4 units)
• Mobile Home Parks
• Apartment Complexes (5 units or more)
• Vacation Rental Investing (Airbnb Arbitrage, VRBO, HomeAway)
• Commercial Investing (shopping malls, office spaces, storage units, etc.)
• Real Estate Crowdfunding
• Real Estate Investment Trusts (REITs)
• Real Estate Syndications
As you can see, real estate comes in many different flavors. By doing your research, you can see which type
of investment may suit you and your portfolio the best. Maybe you’re investing for cash flow or maybe you
are looking to earn a lump sum in a short period of time, regardless, it is important for you to do your
research prior to jumping in.
13 Reasons Why I Invest In Real Estate
The list of reasons why I invest in real estate grows longer each day. Quite frankly it is the ultimate
investment in my eyes for several reasons.
#1. You have far more control over your return in comparison to investing in the stock market. If you want
more of a return on investment, then you can raise rents or remodel the property to make it higher and so it
sells for more money.
#2. It can be as passive or active of an investment as you’d like. For example, if you don’t want to manage
tenants (which you shouldn’t) then you can hire a management company to do that work for you.
#3. The monthly cash-flow is incomparable. Right now, I am house-hacking a four-family home. I am living
in the smallest unit and renting out the other three. While living here, I am making over $600 a month. That’s
right. I am getting paid $600 just to live in my apartment. Then when I purchase my next property and move
out I will make an even greater monthly cash-flow because I will be able to rent out the unit I am living in.
#4. Appreciation. It is said that on average, the real estate market appreciates (or increases in value) by 6%
on an annual basis. Of course, there are off years and nothing is guaranteed however appreciate definitely is
the icing on the cake when you are investing in real estate already making a nice return and get to enjoy the
benefits of appreciation as well.
#5. Leverage is real. This means borrowing money to make more money. To do this in the stock market you
need to have an incredibly high net worth but not with real estate. Lenders let you put down as little as 3.5%
or even 0%. That means you can start making monthly cash flow to cover your expenses and literally use
little to none of your own money!
#6. Equity increases the longer you own. As you pay down your loan on the property, your equity (or the
amount of loan you’ve paid off) increases. This equity can be used to buy more properties or even as a loan
for other investments. Think about it almost as another bank. You are depositing money every month (sure
for your monthly payment) and any money going towards the principal (the lender keeps the interest) is
your bank account. So you are, theoretically, paying yourself.
#7. Fool-proof retirement plan. Most mortgages last for 30 years however they can be for 15, 18, or 20
years too (really the length of time depends on your lender). So say you buy a property today with a
mortgage amortization of 30 years. This means in 30 years your property will be completely paid off and
you will earn all of the cash flow from the property and will no longer have a monthly mortgage payment.
You can literally set up your retirement to earn however much monthly cash flow you need by investing in
real estate.
#8. It is incredibly tax-advantageous. There are some serious deductions allowed for real estate
businesses. The interest paid on your mortgage, maintenance and improvements, home offices, phone
lines, etc. If you run your business smartly, you can have almost all of your expenses deducted when it’s tax
season. For a comprehensive overview of the deductions available, check out this landlord tax deduction checklist. It is important though to make sure you are working with a CPA who is knowledgeable in real
estate. REITs offer dividends.
#9. Depreciation. The IRS lets you depreciate your property for 27.5 years. What does this mean? Well think
of depreciation as an expense, the IRS is saying that as you own your house for longer and it becomes older
it becomes less valuable however as we learned from #4 in most cases your house is actually appreciating.
Therefore with the IRS allowing the depreciation deduction you get bigger cash flow and report a lower
income to your taxes. Think of it as getting an enhanced return.
#10. Taxes are less on real estate than the stock market. If you are flipping houses, as in buying and
reselling in the span of less than a year then your taxes will still be high however if you are in it for the long
haul then your taxes will actually be much lower than gains on other investments. Plus real estate has great
hacks like 1031 exchanges that allow you to sell your property and reinvest the money into a like-kind
property (including any gains) without paying taxes on that money. Pretty sweet deal if you ask me.
#11. Real estate can act as diversification and a hedge against inflation. Investing in real estate can help
you guarantee passive income that your other investments may not be generating. Also, investing in real
estate a completely separate asset class will help diversify your money so that if something happens in one
market, all of your investments won’t be toast.
Additionally, it hedges against inflation because of the demand for a place to live. As long as populations
continue to grow, the demand for a place to live will increase therefore resulting in an increase in rents and
lower vacancy rates. We increase our rents with inflation every year. If our market we’re invested in
experiences higher than average population growth we also make sure to increase rent in-line with that.
#12. Generational Wealth. Have you thought about your legacy at all? I haven’t much either but real estate
allows you to really put that though in place. You can buy properties for your family to hold for multiple
generations to come. You could be helping people that you have never even (or may never even) met yet! By
investing in real estate, maintaining ownership and keeping up with any required maintenance then you
could be ensuring that your family will stay well-off for ages.
#13. Become your own boss. This is a major point for me. I want my primary job to be working for myself. I
want to own enough real estate and have management companies in place so that my only job is making
sure everything is running smoothly and maybe buying some more deals here and there. Real estate
seriously allows this. Whether you want to be your own boss of your real estate company OR you are using
the monthly cash flow to live off of while you start your dream company, real estate can propel you into
financial freedom.
Don’t Fall Into The Typical Trap
Personally, I don’t consider owning your home as a real investment in real estate. Unless you are house
hacking or doing a live-in flip, you really just bought a home for a sense of security (which isn’t a bad thing!).
However, most American’s consider themselves real estate investors once they purchase their home. This is
due to lack of knowledge. Sure, maybe they make some money once they sell their home down the line but
they usually think they made this great return without factoring in all of the expenses they had to pay over
the years like taxes, repairs, utilities, etc. Once you take expenses into consideration, most people barely
breakeven on their investment.
Wrap Up
Whether you decide to start investing in real estate today or you begin to educate yourself on which method
is the best for you, I definitely recommend that you begin looking into real estate sooner rather than later. It
is the perfect way to diversify your portfolio, earn consistent monthly cash flow, and also set up
generational wealth.
If you have any questions for me or if you yourself have invested in real estate, then let us know in the
comments!
For more recent articles, check out:
- Should You Invest In Real Estate?
- The Most Important Pros And Cons Of Investing In Stocks You Need To Know
- My Coronavirus Spending Trends
- How To Make Money Off Your Old Laptop
P.s. if you’re interested in some highly niched specifics topics – such as FSBO sites, you might consider checking out the Real Estate Witch blog. They have some good stuff on FSBO companies, as well as some decent breakdowns of fees paid to realtors.
Hi!
I just discovered your blog and am really enjoying it so far. I want to get more involved in real estate and would love some ideas on where to start and how to get setup for success. I currently have 1 property I am renting out. I am renting it for 1195 and the mortgage is 1023. I put an additional 500 a month towards the principal so I am technically losing money every month, but think that extra principal payment is smart for the long term. I am interested in buying a multi-family home possibly, but am scared about getting really invested in it. Thanks!
Dave,
I used to own about 4 units of real estate in Washington DC.
Paying off mortgage debt isn’t a bad move. That said, if you have any high interest debt like credit card debt or a high interest car loan, you’ll want to get that paid off first.
Second, if you’re wanting to look for a good book on how to grow your real estate portfolio, I suggest you check out William Nickerson’s How I turned $1,000 into $5 Million In Real Estate In My Spare Time. Its old, but its an excellent outline of how to effectively grow a DYI real estate portfolio.