Do you want to know which is the smartest and best way to invest your money?
With the real estate market on the rise, everybody is wanting to get in the action and start investing in real estate. Where is the best place to invest your money?
The answer really comes down to personal preference, your comfort level and how quickly you need to pull out your investment dollars.
Your best course of action will be to research investment strategies to see which fits your situation and risk tolerance the best.
Most folks will decide between stocks and real estate.
Stocks are essentially an investor’s vehicle to owning a piece of a publicly traded company.
An investor buys at a certain price, hoping the company will perform well enough to increase the value of that market price.
Real estate investing is the act of purchasing, managing and selling real estate for a profit.
The value of the asset will be affected by the overall market, improvements you make to the property, and how you manage it if you decide to rent it.
Due to the many different options real estate investing provides and the huge potential ROI, I strongly prefer real estate investing over the stock market.
I also prefer Real estate investing as it is a much more tangible strategy that allows one to be directly involved in the success or failure of an investment.
If, however you need liquidity than real estate investing may not be for you, the best course of action would be to diversify your investments and have dollars in both, real estate and the stock market.
When choosing one investment over the other, you need to be sure to do your research and know what each one entails.
You also need to know what type of returns you can expect based on historical data.
Every investor is different and will need to find where they feel most comfortable.
Playing the stock market comes naturally to some, but for the others, real estate investing is a much more tangible strategy that allows you to be directly involved in the success or failure of your investment.
As I mentioned above, I prefer real estate investing and have tried to give reasons for that preference.
Stocks certainly have their upside though, they are more liquid, have lower transaction fees, are generally less work.
Returns in the real estate investing market have been healthy over time.
Twenty year returns for commercial real estate outperform the stock market.
Investors have seen even better returns on residential and diversified real estate investments.
Of course, attractive returns lie ahead for intelligent investments, but significant cash flow, rising rents, and maybe most importantly, leverage are all major advantages for taking the real estate route.
Whichever route you choose, you need to do your homework.
Leverage in real estate, is an option to easily obtain funding for investments, where as with other non-leverage type investments, an investor would put up 100% of the money for the investment.
Leveraged investments allow you to pay a modest amount for the full investment.
This separates real estate from most other investments, but as any investor knows, leverage carries the risk of a future inability to pay back the leveraged amount.
You don’t want to overextend yourself, as you will risk losing everything like many folks did in 2008.
It should also be noted that investments in real estate carry certain tax benefits that stock market investing does not.
Certain expenses may be deductible, and properties can, at times, be traded into other real estate to avoid capital gains taxes.
When investing in real estate directly, the investor has direct control over the asset that has been invested in. When investing in stocks, rarely does the investor have any control in the running of the individual business.
With stocks, the investor is a silent partner, relying on the management of the company to increase the value of the investment.
With real estate, while the returns may be slightly better over time, more direct involvement of the investor is required.
When done the right way, real estate investing can provide great returns through rental income, tax advantages and the capital appreciation gained from buying below market value.
However, investing in real estate is not for everyone. It takes perseverance and effort to find the best deals.
I have found that real estate is a much better way to invest money than the stock market and real estate offers some unique qualities that make it attractive.
Below are reasons real estate investing is the smartest and best type of investment:
Compounding Growth: If you made a 20% down payment, and the property value rises 5%, you made a gain of 25%. Although the bank owns 80% of your property, you get all the gains, so the 5% rise in overall value is a 25% rise relative to your 20% down. The best part is this is just after year one. The growth compounds significantly after you have held a property for a certain amount of time. There isn’t anything like this in the stock-market.
Long-Term Returns: Stock index funds can underperform inflation over certain time spans. These time spans can include several decades. Real estate has never underperformed inflation over a decade.
Taxes for Income: You get to deduct your mortgage interest and depreciate your property on your taxes. This can mean that you effectively break even on your property, even if the rent doesn’t cover the mortgage. The stock market does not have these advantages.
Taxes for Selling: When you sell a stock, you pay capital gains taxes. However, when you sell real estate, you can put the proceeds in a 1031 exchange, whereby you can defer paying the capital gains tax. Therefore, buying another property within a certain time period helps you compound your growth faster since you have more funds.
Inflation: If you get a fixed-rate mortgage, you have locked in your biggest expense for 30 years (or less depending on what type of mortgage you get). Thanks to rent increases, your cash flow profit margin should improve year after year.
Leverage: You can buy stocks on margin. However, margin interest rates are substantially higher than interest rates for loans related to real estate investing. Additionally, margin loans can get called if your stocks fall below a certain level. Real estate loans are only called if you stopped making payments.
In addition, in real estate you have much more control over the underlying asset. That means there are many opportunities to buy low and sell high.
When you buy below market value, you can build instant equity. It’s important to note that I pass on many more deals than I invest in.
Many offers I make are turned down by the seller.
It is common for sellers to believe their property is worth more than the market will bear.
They do not know what repairs are needed or what the rehab construction costs will be.
They often do not see the issues that make the property difficult to sell in its current condition.
The deals I have done have performed much better than most stock investments.
In addition, there is not another investment out there where you can borrow most of the money to buy an asset and then have that asset produce cash flow that you get to spend and use to pay the debt off.
Investing in real estate can also have its setbacks, which is why it is vital for you to do your research.
Things can go wrong with any investment, real estate is no different.
Tenants can destroy your investment property, home depreciates, neighborhoods go bad, cities go bad, the house is a money pit, the bank calls your loan, business partner is bad, tenants don’t pay, wrong location etc.
Whichever investment you decide on, make sure to do your homework.
Research the decision to choose the path that is right for you.
While one strategy may work for one investor, it may not work for another.
Choose your smartest and best way to invest based on your research, skill set and passion.
Nothing is wrong with investing in both stocks and real estate but if you want to be more hands on and have a real impact on whether you make a good return than real estate investing is the right avenue for you.
Real Estate investing consistently outperforms the stock market when one does their due diligence, so I would strongly encourage you to invest in real estate and take advantage of the many benefits it provides.
So which is the smartest and best way to invest for you? please comment!