Why Real Estate?

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Ok, nothing too flowery. Real Estate is, hands down, one of the best tools of investment out there. Want to know why?

• Take a look at some of the largest companies out there. Walmart. Company revenues = $3.2 billion. Real Estate Asset Value = $78.7 billion. Sheldon Anderson (Las Vegas Sands Cooperation). Company revenues = $589 million. Real Estate asset value =$2.6 billion. Ray Kroc (McDonald's). Company Revenues = $4 billion. Real estate asset value = $29.9 billion. Ray Kroc was quoted as say that he is "not in the hamburger making business, but [that he is in] the real estate business." Ask yourself this after looking at the numbers. Which would you rather own, the business or the land?
• Cash Flow! When you own real estate you can easily generate passive income that pays for itself and then puts money in your pocket. Rental properties, land, leasing, etc. are all examples of how a real estate investment can generate enough income to pay itself off and then have excess money that goes into your pocket every month after all expenses paid.
• Control. When you own stocks, bonds, mutual funds, etc. you generally give control over your investments to a broker or financial advisor. With real estate you have a tangible asset. You can visit it, fix it up, manipulate the operations so as to increase value and performance, etc. You aren't being reactive to market conditions (buy or sell), you are being proactive.
• Appreciation. The average yearly rate of appreciation for the United States is 6%; that means that higher performing markets appreciate at much higher rates, and some markets perform lower. Find the market and pick your rate. Not only does your property increase in value over time, but if it cash flows, that increases over time as well. Consider this. You buy a $200,000 property with 20% down ($40,000) and a mortgage of $160,000. You only have $40k of your own money in the investment., and you get $1,000 a month in cash flow after all expenses paid. Over 30 years time (standard mortgage term) your property pays for itself through cash flow (so the property, not you pays off the mortgage), you then have $1,083,678 in total asset value (if you use the standard 6% rate of appreciation), and your monthly cash flow increases over time to $3,243 a month ( based on average rental growth of 4% a year). So, your initial $40,000 investment is now worth over $1 million, and you still get over $3k a month from it.
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  Stocks vs. Real Estate Over 30 years
  Orig Invest Amt	Appreciation/Growth	Real Estate Value	RE ROI	Stocks	Stock ROI
  $40,000	6%	$1,083,678	2709%	$216,736	542%
  $40,000	8%	$1,863,455	4659%	$372,691	932%
  $40,000	10%	$3,172,619	7932%	$634,524	1586%

  
  *ROI is Rate of Return/ ROI% = return on investment ÷ original investment

• Leverage and Other People's Money (OPM). Basically what that means is that you can put little to none of your own money down and still get a great return. In that last example all you did was put 20% down while the bank (other people's money) took care of the remaining 80%. Some banks will finance 90-100% of the worth. With stocks you can still use OPM by buying on margin, but you can't borrow more than 50% of the stock's worth.
• Depreciation. Basically you can use the yearly expected deterioration & wear and tear on your property as a tax deduction. For residential investments it's 27.5 years, while commercial property it's 39 years. The equation looks like this: (total asset value - land value) ÷ depreciable years = Annual depreciation amt. Land is not depreciable because it's not an actual structure. Here's an example of a residential asset that's worth $19.7 million (land value $3 million). ($19,700,000 - $3,000,000) ÷ 27.5 = $607,273. If, after all expenses and debt this property has a cash flow of $300,000 that means that (depreciation - cash flow = 307,273) you can show depreciated value of your asset to be $307,273, so you don't have to pay taxes on the $300,000 cash flow. Now, that's a lot of mula. (You must beware though, once you sell the property the total amt depreciated through the years you owned the property will be due. One way to avoid this is to do a 1031 exchange.)
• Refinancing. You buy a property, it increases in value, you borrow from the bank the difference between the amount paid and the current value. The money is tax free and all yours. Example: bought property for $9 million, 5 years later it's worth $15 million. The property covers the increased mortgage amount and you pocket or reinvest the $6 million.
• Asset Protection. First, you can insure your investment; in fact, you are required too, and your asset pays for the insurance, it's tax deductable, and you get money left over. You can own properties through LLC's and other coorporate entities that protect your investment. Also, there are a variety of other tax and legal advantages to owning real estate that other investments just don't compare to at all. Check with your attorney or tax accountant for more about that.
• 1031 Exchanges. You buy a property, it increases in value, you sell it, take the profit and reinvest it in another property TAX FREE!! Of course, you have to do it right and have a 1031 specialist to help you through it, but this is a great way to contiually build your asset value.
• Hedge against inflation. Since 1913 the average yearly inflation amount is 3.5%, or 4.1% if you factor out the great depression (the only time inflation was in the negatives). Savings bonds get you 2-3%, real estate gets you 6% PLUS a plethora of tax advantages AND cash flow.
• It's physical. When you own real estate, you own an actual physical asset. You can visit it, fix it up, force appreciation, etc. Stocks and the like, come and go at the touch of a button and can go from a great investment to zero in seconds, while real estate changes value at slower rates that allows you to, if you watch market conditions, etc., easily avoid pitfalls and depreciation.

*information from this article was taken from Ken McElroy's book The Advanced Guide to Real Estate Investing (a Rich Dad advisor book).

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