Most believe that owning real estate is glamorous, it’s sexy. If you own real estate, you are part of an exclusive club, an elite group who wear suits and drive fancy cars (definitely a potential side effect), that only the smart and rich have access to.
It is true that real estate done right offers more than other investment vehicles. Buying real estate isn’t as daunting as you may think. Yes, there are barriers to entry, but you can break them down by understanding the nuances and learning how to get started today.
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Why Should You Invest in Real Estate?
1. Tangible Investment
Property is a physical asset that you can drive to, look at, and show off to your friends and family. It exists in the world unlike other investments that are strictly electronic or pieces of paper that hold minimal value if the markets were to crash.
2. Less Volatile
Stock prices change every second while the market is open and then during afterhours trading. You emotionally ride the highs and lows every day. The value of real estate really only changes when you sell or get a loan, which is an event that happens as frequently as every 5 years or as rarely as every 50 years. The major volatile aspect is income, where your rents and expenses shift, but are fairly predictable.
3. Income, Appreciation and Tax Benefits
The goals of investing come down to cash flow, increasing net worth, and the impact on your annual taxes. Real estate supersedes other investments across the board. Investment properties provide rental income that offsets operation expenses and debt service, with the remainder being cash flow in the investors’ pockets. Properties naturally appreciate year over year, increasing in value slowly over time. While enjoying this cash flow and appreciation, investors get to shelter the income through depreciation and write offs to lower their tax basis. When a sale does happen, you can defer the capital gains tax by executing a 1031 exchange, which means taking the proceeds and buying a similar property.
4. Proven to Create and Preserve Wealth
If you look at the wealthiest families in history, real estate makes up a significant portion of their portfolio. Why? Because of the income produced, it’s natural appreciation, the tax incentives and real estate’s stability and security.
How Can you Invest in Real Estate?
1. REITs and Real Estate Index Funds
REITs are companies that own a portfolio of properties and package them together for investors to buy shares of. REITs tend to be publicly traded on the open market, giving everyday investors access to hold partial ownership of institutional quality assets, while achieving safer and more stable returns than stocks and bonds.
2. First Trust Deeds
Most buyers leverage their properties by taking out loans from banks, but some investors may not qualify for standard loans. There are private lenders that will issue the loans and charge the borrower a higher interest rate and fees. In turn, these companies offer 6-8% annualized returns to its investors that supply the capital for the loans, but there are no tax incentives as an investor because they do not own the real estate as the supplier of debt.
3. Buy Property for Yourself
If you have the time, energy and knowledge, the best way to reap the benefits of real estate is to purchase your own assets. This is obviously the most difficult as you have to source the deals, negotiate the contracts, front the equity and secure the debt, close the deal, and manage it. There are no splits or fees, but you are 100% responsible for any risk and are not as able to diversify.
4. Syndicate Investments
To offset some of the risk of owning outright and increase diversification, you can bring outside investors into your deals. This will decrease your personal capital requirements and allow you to buy more properties. You can incorporate fees and splits for sourcing the property and for managing it. Just make sure you have proper agreements in place to structure the ownership and management.
5. Invest with an Operator
If you don’t have the capacity to do it yourself, you can invest with an owner-operator who brings investors into their deals. They offer you the ability to own real estate without doing the heavy lifting, but do take fees for sourcing the deal and managing it. The keys to look for are:
1. Is this someone you want to invest with?
2. What is their track record? (Best deal, worst deal, and average return to the investor)
3. What markets do they invest in?
4. Do you align with their investment strategy?
5. How do they take their splits?
The benefits of investing real estate outweigh those of other assets. If done right, risk can be mitigated as best as possible while still providing above average returns.