Americans are faced with a lot of options when it comes to investing their money. These options include savings accounts, mutual funds, stocks, bonds, precious metals and more. With all these options, a study by BankRate.com shows that real estate outpaces each of these as America’s favorite investment. The survey asked what is the best way to invest money that’s not needed for 10 years. The respondents replied real estate (31%), beating cash investments (19%), the stock market (20%) and gold/other precious metals (11%).
Beyond these numbers, there are two reasons that makes real estate even more attractive than other investments:
1. Paying a mortgage means that you can build up equity instead of paying a landlord;
2. The real estate you live in provides a home for your family. Certainly, stocks or bonds cannot provide the intrinsic value of a home.
But what if you already own a home and still have money to invest? Is real estate the way to go even if you are not going to live in the home and replace the rent you would have paid? The answer is yes for many Americans. Close to 25% of all home sales in the United States were for the primary purpose of investment in 2021. What is the attraction?
– Going back to the landlord analogy, if you own a rental property, now you are on the other side of the equation. You are the landlord and your renter is making your mortgage payment for you. This increases the amount of equity you gain each month, as part of that mortgage payment goes to pay down the principal of the loan. If you read the iconic book – “Rich Dad, Poor Dad,” by Robert Kiyosaki and Sharon Lechter, as an example, the authors advise you to purchase three $200,000 homes, one of which you would live in. This would be as opposed to one $600,000 home to live in. That way others are paying two-thirds of your mortgage payment.
– You are leveraging your money. Unlike stocks, bonds and metals, real estate lets you leverage your investment. Thus, you can own a larger asset with the cash you have in hand. Imagine you have $50,000 in stocks and the stocks go up in value 5% per year. Owning a $400,000 house that appreciates even 3% per year will provide a greater return in the long run, because 3% of $400,000 is much greater than 5.0% of $50,000.
– You can re-leverage your money. If you put 5% down on your home, but now have $100,000 in equity because you purchased 20 years ago and the home is now worth $300,000, taking the equity to purchase a second property would mean that you have $600,000 in real estate assets appreciating, instead of $300,000. If real estate keeps appreciating, your gains will be two-fold.
– There are tax write-offs for investors. Those who have moderate incomes and manage their own properties can write-off the losses from rental properties, including depreciation. And if your income is too high to write-off the losses, they can be carried over for future years where they can be used to offset future passive income or gain on the sale of the home. You are advised to consult with a tax advisor before determining the tax advantages of a rental property.
In short, there are many benefits to investing in real estate individually. Becoming a landlord is not for everyone and there is certainly more work involved when owning more than one property, but the benefits can be substantial. Imagine retiring in your rental property which now has no mortgage on it because your renters have paid it off for you!
