There are multiple approaches to wealth creation.
There’s the accumulation component (i.e. working to generate income) and there’s the multiplication component (i.e. investing). If you’re serious about building wealth, you can’t ignore the investing side of things. This is especially true in an inflationary environment where holding cash is basically the same as paying the bank.
The question is not about whether investing is something you should be doing. The question is, which investment vehicles are best?
While there are dozens of ways to invest, you’ll commonly see stocks and real estate listed as top recommendations. But how do they compare to one another? Is one better than the other? And, if so, what makes it stand out as the superior choice?
I’ll start by saying I believe in the power of diversification in investing. (I think it’s best to spread your investments out across multiple investment classes, while also investing in multiple individual assets within each of those classes.) However, if I had to choose just one – real estate or stocks – there’s no doubt in my mind which one I’d go with. It’s real estate…by a long shot. And I’m not alone in my thinking. Once you pop the hood and look at the benefits that real estate investing offers, you’ll see why real estate wins the day.
The power of real estate can be found in the fact that it doesn’t rely on a single advantage. When you own real estate, you get to enjoy a long list of benefits, including:
You get a lot more control with real estate than you ever do with stocks. As a single investor in a billion-dollar company, you don’t have any say in what happens. Sure, you might technically be a shareholder with voting rights, but unless you own millions of shares, you have no real sway.
With real estate, you typically have all of the say – especially if it’s your property and your name is on the title. Want to renovate the house so you can increase rents? Do it. Interested in tearing down the house and building a duplex? Go for it. Want to sell the property so you can move the cash into another investment? That’s your call.
This might be the most powerful aspect of real estate investing. Unlike stocks, which require you to have the money on hand in order to purchase shares, real estate taps into the power of leverage. You can put 20 percent down on a property and finance the other 80 percent with someone else’s money. And because of that, your effective return rate multiplies.
Let’s say, for example, that you find a rental property that you like. You know right away that you can generate positive cash flow from month one. Well, even if the property value only increases by an average of three percent per year (which is a very conservative number), your 20 percent down payment will generate a 15 percent cash-on-cash return. (And that’s on top of the cash flow from rental income.)
When you own rental properties, you get a monthly rent check in the mail each month. Assuming you did your due diligence and ran the numbers before buying the property, this check will be larger than your mortgage payment and other property expenses. A decent property will net you somewhere between 8 to 12 percent annually right out of the starting gates. (However, these figures tend to increase over time as rents go up.)
We haven’t even discussed taxes yet, which some investors argue is the biggest benefit of owning real estate. By purchasing investment real estate properties, you can catch some pretty major tax deductions, including:
Plus, when you sell a property, you can use a 1031 exchange to defer capital gains taxes. As a stock investor, you don’t get nearly the same tax benefits as you do investing in real estate.
When you own a stock, you don’t even get a piece of paper or certificate these days. The only thing you get is a number on a statement. You can’t touch, hold, feel, or visit a stock. Real estate, on the other hand, is the very definition of tangible.
With real estate, you can drive by and see it. You can visit it. You can even manipulate it by building structures, renovating existing ones, or harvesting the land (in the case of raw land or farm land investments). There’s something fairly reassuring about this.
While no investment is truly risk-free, rental real estate properties are economic stalwarts. What does this mean? It means that rental properties tend to hold up against inflation, as both property values and rents often increase alongside inflation.
But what about a real estate crash? After all, bubbles burst and there are times when markets collapse for a period of time. Isn’t it dangerous to be a real estate investor during this time? Well, not really. As long as you aren’t over-leveraged or need to sell a property, you should be fine. There’s actually an increased demand for rental properties during crashes (as fewer people are buying homes). You shouldn’t have any trouble finding tenants for good properties.
There are so many different ways to invest in real estate. In addition to single-family real estate and commercial investing, there are real estate investment trusts (REITs), investments in retail, wholesale real estate investing, and even self-storage. That means you can diversify your investments even within the larger class of “real estate.”
Okay, this might surprise you – especially considering stock investing is the bread and butter of the average investor’s portfolio and long-term retirement plans. But did you know that real estate historically beats out the S&P 500 when it comes to average annual returns?
According to a study conducted by Arrived, the historical returns for single-family rental properties far outmatch the returns of the stock market. Looking at the past 20 years, people who invested in real estate would have netted an 11.7 percent annualized return. By comparison, the average rate of return for the S&P 500 was 9.43 percent over this period. (And, for the record, their study only ran through 10/31/21, meaning the disparity is actually much higher.)
At InvestNet, we exist to help investors grow their portfolios. Whether you’re looking to add real estate to your portfolio, or you’re interested in private equity deals, we can help find the right match for your money. Contact us today to learn more!