Should You Invest in Real Estate or Stocks?

I am asked this question quite a bit.

When looking to invest, you need to consider your goals.  That is, do you want appreciation (the asset to go up), cash flow (income from the assets), or both.

Real Estate has 4 advantages over stocks and bonds

With real estate, you get leverage, control, tax benefits, and the tangibles aspects that stocks and bonds don’t give you.

Advantage #1–Leverage: You can buy real estate with only 3.5% down if buying for yourself to live in or 20% down if you are buying the property as pure investment.

Hypothetically, this means you would control a $200,000 asset with only a $7,000 to $40,000 investment (down payment) and enjoy the benefits of it increasing in value over time, creating income or both.

With stocks and bonds you may have a margin account (ability to borrow against the value of the asset) but only after you paid 100% of the price. If the value of the asset goes down they can call the margin loan due and payable.

If you like control, but don’t want to spend too much of your money real estate wins this one.

Advantage #2—Control: Unlike securities, real estate allows you to take over a problem, say an old apartment building, fix it, and profit from your efforts.

Rarely will a company, where you own stock, allow you to come in and tell them how to improve their bottom line…that is unless you are Warren Buffett.

Real Estate, gives you the opportunity to own a tangible asset, see and fix a problem, manage people and finances, and profit from it immediately or over time.

This is called being a value buyer.

Advantage #3—Tax Breaks: Real estate gives you some tax advantages that stocks and bonds don’t.

Real estate can earn money and be offset by a tax write off called depreciation.

Depreciation is the tax incentive that the government gives for you to maintain and improve the property over the years.

Whether you spent money or not they assume you are. This is a paper loss or phantom loss.

So if the property has $300 per month in cash flow you may keep this income tax-free, as your tax liability may be offset by the depreciation.

Real estate and securities both have a tax treatment called the “exchange” that can defer income into eternity, so they are equal there.

To learn more go to http://www.IRS.gov and look up IRC 1031 and 1033.

Advantage #4—The Tangibles: Real estate also fulfills a need for altruistic “feel good” endeavors.

You can make a positive difference in the world knowing that you are providing quality housing for others.

By owning rental property, you are improving the tenants’ lives and neighborhoods in which they live. Improved neighborhoods mean more money for schools, and better schools means increases in property value.

Usually you wouldn’t get those “feel good” feelings by investing in stocks.

When you buy a beat-up 14 unit building in a low income area, clean it up, get rid of the nuisances, and maintain it, you know you have done “good.”

If you’re interested in knowing more about investing in property, then contact me today for your free 90 minute consultation.

“The Good Life is Within Your Reach!”

The above illustration is for demonstration purposes only and is not a true case study. Investing in any asset involves risk and you should therefore consult tax, legal and financial experts before investing as individual results may vary. 

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