Yes, as you may have heard, Bitcoin has gone through the proverbial roof of late and cryptocurrencies are all the rage. There are also plenty of sexy startups out there and I’m sure your friend has a great stock tip or two. And you probably know at least one gold bug.
I don’t mean to dismiss these other investments, indeed, many of them are just fine and I admire some of the more affluent cryptocurrency investors out there. But over the long haul, there’s simply nothing better than real estate—particularly the buy and hold kind—in my humble opinion.
The reason real estate is so powerful as an investment is because of the litany of different advantages it holds. These can be summed up with the simple and easy to remember acronym; IDEAL.
I: Income
Of course, if you hold a piece of property, you don’t just benefit from potential appreciation, you also get the cash flow each month.
D: Depreciation
The IRS allows you to count property depreciation against your income if you are an active real estate investor. So, each year you can write off two-fifty-fifths (or one-thirty-ninth if its commercial) of the value of the property against any income you made. Yes, you’ll have to “recapture” it when you sell (if you don’t do a 1031 exchange), but this advantage substantially reduces your income tax liability.
E: Equity Buildup
If you use debt, each month you pay off a little of that principal. And if the property is cash flowing (which is the only type you should buy in my opinion), the tenant is effectively paying your mortgage off for you.
A: Appreciation
Over the long term, the value of real estate goes up. Not always of course, such as back in 2007, but the historic average has been about 4 percent, and it has been much greater in some markets.
L: Leverage
It’s much easier to get debt on a piece of property than a stock or cryptocurrency or whatever else. This allows you to buy bigger assets and compound your returns. If a property goes up 4 percent and you have an 80 percent loan, your actual gain is 20 percent!
“Oh but wait! Leverage is a two-edged sword,” you might say.
True, but real estate investment has a built-in way to mitigate that risk while simultaneously taking advantage of the above noted benefits of leverage. And that method is simply buying a good deal with built-in equity.
In the stock market, it is extraordinarily difficult to buy under market. That’s because anyone can buy or sell whenever they want. It’s an “efficient market” as economists say, or at least something close to it.
But real estate is not. It’s not for what many will say is one of real estate’s other great weaknesses: illiquidity. Namely, it can be hard to sell a piece of property.
Contrary to the naysayers however, real estate’s illiquidity is actually one of its greatest strengths. Because real estate is hard to sell, it is possible to find motivated sellers or value add opportunities. Let’s say you buy a property at 80 percent of its market value, then not only have you made 20 percent right off the bat, but you’ve also drastically reduced your risk.
For one, real estate isn’t that illiquid if you sell if to for only 90 percent of its value. And having bought right, you have the room to do that if need be. Furthermore, that 20 percent offers you plenty of insulation in case the market goes down. So, if prices dropped 10 percent on the above example, you would still have 10 percent equity in the property. Not bad for a sinking market!
There are not many other investments that have this type of ability to buy under market. And then once you add in all the IDEAL benefits, real estate investment becomes an even more obvious choice. Thus, it shouldn’t be surprising that when John Jacob Astor, the great real estate investor and America’s first millionaire, was asked what he would have done differently, Astor answered as follows, “I would have bought every inch of Manhattan.”
Even the best real estate investors wish they had bought more.
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