Real estate is a journey: for buyers, sellers, and owners. For some, it's an odyssey. As a real estate professional, I've had my own 25-year odyssey and it has formed strong opinions on how the real estate and financial services industries often misinform consumers. (I know, you're shocked to learn I have strong opinions on something.)
Most financial professionals will tell you that core assets are stocks, bonds, and cash equivalents. Real Estate is an "alternative" asset. This does two things: 1) makes most people think it's only for wealthy, sophisticated investors and 2) dissuades homeowners from actively managing their home's value as they would their financial assets. Yet long-term studies show that homeowners' wealth is 46x that of renters, and real estate is the #1 creator of millionaires in the US.
My own professional odyssey has taught me that, for most people, real estate should be a core asset over their lifetime. It offers myriad advantages over more traditional assets, including:
Appreciation/Forced Equity
Leverage
Inflation Hedge
Cash Flow
Incredible Tax Advantages
Appreciation/Forced Equity
Appreciation isn't a unique quality to real estate. But if you have a mortgage, every time you make a payment you're converting some of your debt to equity. Yes, it's your money already, but think of it as a savings account that you're forced to contribute to every month.
Leverage
What asset other than real estate can you buy 4x to 5x your money's worth? If you invest $100k in stocks vs $100k in real estate with an 80% mortgage, and both grow at 5% annually, in 10 years your RE will yield over $250,000 more than stocks - net. If it's investment property the deal gets even sweeter. Put another way, stocks would have to yield 15% annually to deliver the same wealth as RE at 5%.
If that's not good enough, consider this: borrowing on real estate is some of the cheapest debt you can get. Today you can get hundreds of thousands of dollars for 3.5% or less, fixed for 30 years! Now consider inflation over those 30 years, the mortgage interest deduction compliments of Uncle Sam and that money you borrowed to buy a house is essentially free.
Hedge Against Inflation
Inflation hasn't been much of an issue lately in the US, but incomes have been fairly flat for years and when inflation does return, people will feel it. Where financial assets tend to lose value during inflation, real estate generally stays ahead of it in real terms. So your investment value doesn't deteriorate over time.
Cash Flow
Would you like someone else to pay your mortgage for you? And maybe have a little extra cash in your pocket? (If anybody said no, call me immediately. We need to talk!)
This is exactly what you get with investment property. You get all the benefits listed above, plus someone else is paying your debt service. Investment real estate is a favorite topic of mine, and there are a million ways to approach it. The topic is too broad for this post, but for most non-professional investors I typically recommend multi-family properties to start with. This can be as simple as a duplex. If the property has 5 or more units it's considered a commercial property. This only matters in that it opens up some very interesting financing options.
Tax Advantages
Real estate has so many tax advantages, it amazes me more people don't pursue it. Most people know about the mortgage interest deduction on their home. The 2018 Tax Cut and Jobs Act hit high-priced regions like the Bay Area hard by limiting itemized deductions.
But investment property is a business, and all your business-related expenses are deductible against your income. So there is no cap on tax benefits of mortgage interest. (And remember, someone else is making the payment, and you get the tax benefits.) You're also writing off other operating expenses such as utilities, insurance, repairs and maintenance, etc.
Depreciation. The tax jewel of investment properties. Every year (for 27.5 years) you get to write off part of the value of your real estate. This is called a non-cash expense. In many cases, you will have positive cash flow (cash in your pocket) but owe no taxes on it because depreciation pushes you to a taxable loss. The IRS will take back some of this when you sell the property, but financial benefits to the investor are huge.
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