In my ebook The Personal Cash Flow Formula I outline my personal journey from stock investing to real estate investing. Real estate is one of the popular and recommended assets to store cash in. However, oftentimes, real estate investment is pitched against other investment types such as stocks, mutual funds, and bonds. For new investors such comparisons bring on headache and confusion.
This article aims not to settle the debate between which investment vehicle is superior, but rather to open your eyes to 8 advantages that real estate in general, and multi family real estate in particular, has over stocks.
8 REASONS WHY YOU SHOULD INVEST IN REAL ESTATE
1- Passive Cash Flow Income (that you can spend now)
One of the primary reasons people invest is to create a passive stream of income. If this describes you, then investing in real estate is an excellent choice because it generates predictable cash flow. Rent from real estate investments can provide investors with reliable cash flow–money you can spend, monthly. Typical cashflow from real estate investments ranges from 6% to 11% a year.
Contrast the above with stock investing. The only real way to get cash flow from stocks is to invest in high dividend stocks and to cash out the dividend periodically. On a practical level almost nobody does this as it is administratively a hassle. Most stock brokerage firms automatically reinvest dividends into buying more stock (which is sound) but most stocks either don’t actually pay a dividend or pay a dividend of less than 2%. Further, companies can choose to cut the dividend at any time, depending on company performance, economic conditions, the need to use the cash for internal projects, etc.
2- Stocks are extremely volatile compared to real estate investments
GameStop (GME) or Roaring Kitty anyone? 🙂 If any of you were fortunate to have bought a few shares of GameStop before Christmas 2020 you experienced first hand the rollercoaster that ensued. GME’s 52 week low was $2.57. In late January 2021 it peaked for a few seconds at $483 before retreating back all the way to below $40 a share about a week later. As of this writing GME is again causing many grief and others joy as it closed above $263 on March 12, 2021. A number of people made lots of money and many others including some hedge funds went bankrupt.
Perhaps in slightly less dramatic fashion Tesla (TSLA) stock was one of the best performers of 2020, at one point making Elon Musk the most wealthy person on the planet. This, however, was short lived and the stock has lost about a third of its value in the past six weeks. There is money to be made in the stock market, and as I mention in The Personal Cash Flow Formula, I was able to use success in the stock market to launch my real estate investments. The reason I moved a majority of my personal wealth out of stocks is because of this volatility and the total lack of control.
Unlike stocks investments determined by the economic outlook of a company, multi family real estate remains stable in an economic downturn. The demand for apartment rental properties never declines significantly. People always need a decent home.
Case in point: the performance of real estate during the COVID 19 pandemic. Studies by the National Multifamily Housing Council show that 93.3% of multifamily apartment households paid rent as of May 27, 2020 and 89.2% of tenants paid rent in April of 2020 (the height of the pandemic). This statistic shows the robustness of multi family real estate relative to other real estate asset classes. Although office space, retail and hospitality were hit hard and felt the brunt of the pandemic’s economic impact, multi family assets have been stable and may even have appreciated in value slightly as investors recognize the quality and stability that these assets provide.
3- Scarcity
Real estate is relatively scarce. As the world population increases over time there is increasingly more demand for places to live. In 1980 there were 4.46 billion people on Earth. By the year 2000 that number had increased to 6.16 billion. Last year, in 2020 we got to 7.79 billion. In the United States the population numbers in 1980, 2000 and 2020 were 229 million, 281 million and 331 million respectively. We have added roughly 100 million people in 40 years or in other words about 2.5 million people per year. All these people need a place to call home. These demographic trends guarantee continued demand for a place to live.
4- Leverage
Arguably, the biggest advantage to real estate investing is the ability to use other people’s money to control a real asset (leverage). In real estate transactions you typically borrow money to reduce the amount of money you need to acquire a property. Leverage allows you to dramatically increase your returns.
Let’s assume that you buy a $200,000 property with 10% down ($20,000). If the property increases in value by 10% to $220,000 in one year and you sell, you would realize a gain of $20,000. Remember that your original investment was $20,000 which means you just doubled your money making your effective return equal to 100%! Leverage makes this possible.
5- Tangibility, Illiquidity and Security
If you have ever applied for a loan or acted as a guarantor, you know that financial institutions prefer physical, tangible property over intangible assets such as stocks. For that reason, real estate can be used to apply for loans or used as collateral for accessing special services.
In the words of Russell Sage, famous American financier at the turn of the last century, “real estate is the most solid asset ever developed by human ingenuity.”
The fact that real estate is not liquid and because you cannot log into your brokerage account on any given day to see how much money you have made or lost it allows cooler heads to prevail. Owners seldom sell real estate at its peak low by accident. The process is long and allows real estate owners to digest their actions before executing. This is very different from what happens in stocks where emotions often run high and very quickly the moment is past.
6- Tax Advantaged vs Stocks or any other asset class
The US government incentivizes the ownership of real estate by providing a plethora of tax advantages from tax credits, to depreciation, to 1031 exchanges. This is how many wealthy people get wealthier and pay minimal tax while others with less means, pay taxes at the highest income earning bracket.
The passive cash flow referenced in #1 above is frequently totally tax free because of depreciation that real estate generates. By contrast stock dividends are taxed at a long term capital gains rate of 15% or a short term capital gains rate of 30%. This is a dramatic difference.
The federal tax code permits the depreciation of the value of investment property over time. In reality, the value of your property typically increases over time. So the depreciation deduction law allows a property owner to generate higher profit from their property while filing lower income for tax purposes. This makes no sense but it is the law.
7- Simplicity
The risks and rewards of a real estate investment are relatively easy to understand and you don’t need a business degree or a Masters in Accounting to make the right decision. The business model is fairly straight forward. In contrast, many companies are publicly traded without any real earnings. People buy these stocks with the promise of growth and future profit. Some work out wonderfully, while others become catastrophic disasters. With publicly traded company stocks a non trivial amount of financial analysis is required and even when done well you have to be in the right technical cycle as the Wall Street algorithms may sweep up your stock in an ETF driven sell-off.
8- Control
One of the most attractive advantages of real estate is that the asset can be improved, rehabilitated, or put to a higher use to generate better returns. Considering the fact that real estate is a tangible asset made of wood, stone, glass, and metal, it can be modified, in other words, renovated to suit the present demands of consumers. It doesn’t matter that the modification is cosmetic or structural; any positive change improves the appeal of your property and its value. Unlike single family housing, multi family property is valued as a business. This means that the owner does have a lot of control over the value of their asset. By making the right investments in the property they can drive up the net income that the property generates and hence the value of the property.
In contrast, nobody calls the average shareholder to let them know that a publicly traded company is making changes which will send its share price lower. You find out when you hear about it on the news. There is no control with stocks.
Summary
Considering the points above, it is clear that investing in real estate is a practical choice. We recommend multifamily properties because they bring excellent returns with low volatility and the many other financial advantages discussed above. Now rather than asking why should I invest in real estate, you should ask yourself how best you can get involved–actively buying something or passively investing with an experienced operator.
If you don’t have the time or inclination to learn every aspect of owning and managing a real estate investment yourself, consider using the services of reputable operator such as us. With this option, you can leverage the knowledge and skills of several real estate professionals to your advantage. We do the work and you get the benefits.
We look forward to supporting you in your desire to expand your wealth and reach your financial goals by investing passively in multifamily real estate. For a more detailed discussion of the above points download our ebook The Personal Cash Flow Formula.
