Advantages of the real estate investments
Everybody has heard at certain point of time that the rich guys invest their money in real estate but few people ask themselves why? Actually, as humans we can't do anything without real estate. For each of our activities we need some kind of property where this activity should be executed. This might be a residential real estate where to live in or an office where to work or a factory where to produce our goods.
There is one very popular story in this line of thoughts. In 1974 Ray Crock (the founder of McDonald's) asks a group of students from the Texas University in which business they believe he is. They have laughed and answered he is in the hamburger business. For their surprise he denies and clarifies he is in the real estate business. Indeed, today McDonald's is one of the largest owners of real estate in the world.
But hold a minute. Why the real estate investments are so attractive? Here I will present you some interesting reasons, which make the real estate very attractive assets that could easily bring you additional income.
1. The real estate belongs to the so called "hard" assets. To the same group belong also the precious metals like gold, silver etc., as well as commodities like the crude oil, the wheat etc. These types of assets are suitable for inflation protection of the already accumulated capital. Even popular paper assets like the stocks don't offer the same inflation protection as the real estate. The major difference with all other investment types is that the investment in real estate could secure you recurring monthly income or said very simple – it could bring you additional income. Even the American companies are paying dividends on a quarterly basis which will not help you with the electricity bill and the rent.
2. The real estate is a heterogenous market. What I mean is that if I buy stocks of Coca-Cola and in the same time some other investor in the world is buying stocks in the same company, my stocks and his/her stocks will be absolutely identical. They will pay the same dividends, will provide us with the same rights and at any point of time will have the same market value at the stock exchange because the stock exchange determines the market price of any stock. With other words the stock market is a homogenous market because the assets are the same for everyone.
This is different on the real estate market. Each property has its specifics and differentiates from the others with its own advantages and disadvantages. This makes it possible to negotiate the price of a real estate and to determine the purchase conditions. Each real estate transaction is unique as terms of financing and execution. This is impossible with the stocks. You either pay the stock market price or wait until the market eventually comes to a level that is acceptable for you. You can't negotiate the price or the conditions of the ownership transfer.
This simply means that if you choose wisely you could buy a property with a market value of EUR 100.000 for EUR 80.000 only and to realize a good profit immediately. This alone makes the accumulation of equity very fast.
3. Recurring income. In contrast to the other hard assets the real estate offers recurring monthly income, which allows the investor to keep the investment for a very long period of time. It is not necessary to sell your property in order to cover the monthly bills or some other regular expense that you have. This privilege can't be offered by the crude oil or gold. As mentioned you have to sell part of them if you want to take some of the profit.
Based on the recurring income offered by the real estate you get not only more flexibility but you could also eventually achieve your financial freedom and escape the 9 to 5 job. For many people this is also the main reason to invest in real estate. I would like to think that I count also to this group of investors.
4. The real estate market is a very slow market. This is one of the best features of the real estate market in my opinion. And it is often underestimated. Think about it. If you trade currency you have to follow the market each minute because you may miss important movement of the market. The changes on this market are very quick. If you decide to invest in stocks you may be good served if you monitor the market few times a week. If you invest in fixed income securities you may even look at the market several times a month and it should be enough.
If you invest however in real estate you may take a vacation on the Caribbean for three months and after you are back you will discover that nothing has changed. This characteristic of the real estate is the foundation for its stability. They obey as well the general economic cycles but the movements there are so slow that you may recognize the changes in the cycle and prepare well in advance. Hence the next fundamental advantage of the real estate as investment asset class.
5. The banks finance real estate. When you make a statement like this everybody will say: Yes, we know this. But think for a moment if the bank will finance you with the same willingness if you want to buy some stocks and repay the loan for 30 years? I doubt it. And why it is doing it with the real estate? Because the banks consider the real estate as very stable investment asset as a whole. The other reason is that the property investment could generate monthly cash flow that will service and repay the loan. Yes indeed, if you rent the property you may collect a rent that in the most cases will not only pay the bank but will secure you additional income. The usage of leverage is a fundamental advantage for the real estate investments. It is not given to all types of investments. The combination of a proper leverage and the slow movement of the market give the real estate investment cutting edge advantage that is unique. What I understand under "proper leverage" is explained in my course The Property Cycle: How to identify the best time to invest.
6. The price of the properties increases with the time. In the today's economies this happens inevitably. I will explain why this is the case right now. The price of the real estate rises dynamically in regions which are attractive and many people have the desire to live there. These are the large cities because there have established themselves as cultural, educational and entertaining centers servicing large territories. If the demand is bigger than the supply it is just normal the prices to rise.
There is still another much more important reason for the constant increase in the real estate prices. Actually, not the value of the real estate increase but the value of the money we use to pay for it decreases. That why we need more of them. That is the reason why the same property will cost much more in 20 years than it costs today. For this period the inflation will devaluate the value of the money and in the same time the value of the property has remained the same. That means we will need more paper money to buy it. This is the idea behind the statement that the real estate offers good inflation protection (see point 1). Without going into details, I will like to bring your attention to the fact that the above statement is not valid for the financing of the respective real estate. The inflation impacts it negatively. With the time the difference between the price of the real estate and the underlying financing becomes so big that the financing represents a small portion of the property value. In order to observe this, you must be patient and wait at least 15 years even more. If you have done it well you will receive in all these years the rent from the property which will also repay the bank loan.
7. Tax and accounting advantages. The real estate offers some tax advantages that can't be compared with anything else. If you have purchased the property with a company the legislation will allow you to deduct amortizations that should reflect the loss of market value of the investment good you have invested in. In particular the amortization tenor for the real estate is 25 years. That means you are allowed to deduct 4% of the property value per annum against your taxes. For three years the deduction is 12% respectively. The big question here is whether the market value of your property has really decreased by 12% in three years. Let see the examples with a car. You may depreciate the car as well. The tenor there is 5 years. Each year you may deduct 20% of the vehicle's value against your taxes. BUT its value really depreciates! In this way the law makers want to keep you competitive and to take into consideration the real depreciation of the assets. In the case of the RE the story is different because they increase their market value with the time and you still have the right the amortize them. This gives you significant tax advantage as investor.
8. Control! This is one of my favorite advantages of the RE. Let us assume that you decide to invest in stocks of BMW. This is stable company with significant market share and reputation. As investor in the company what could you do personally to increase the value of your stocks? To go out and buy as many BMWs as could afford? I think you should agree that you don't have many options. If you invest in real estate however you to do many things to your investment to increase its market value. You have a choice. You have control. You may do a painting job or rehab the bathroom or exchange the furniture that will allow you to command higher rent. I believe that the good investors strive to control their investments. Otherwise try your chances in the casino. You can't control the end result there.
9. Better performance the average on the market. When we speak about estimating the performance of certain investment we compare it normally with the average on the market. In the case of stock investments, we compare the profitability of a certain portfolio with the performance of certain stock index like the S&P, Dow Jones Industrial etc. Speaking about RE it is easy to bit the average on the market. The average on this market includes all properties on certain market (Bulgaria, UK or USA). However, it is clear the price increase in not the same in all smaller regions of these market. For instance, you may expect that the price increase in the larger cities will be more significant compared with the smaller cities or even villages. The point is that if you invest in the areas with higher potential growth you will easily higher profitability than the average. On top you may invest in currently trending property types. I personally for the moment invest in one suburb of Sofia that is specialized for students. I try to avoid the demographic problem in this way. Or imagine you invest in retirement facilities for older people because the population becomes older in many countries.
10. Advantages of the residential real estate. The main advantage of the residential real estate is that you don't need specialized knowledge to know what constitutes a good residential property and whether it is rentable or not. Everybody knows this because we all live in houses, apartments etc. You need enough light, at least one bedroom, one kitchen, bathroom, restroom etc. Each of us could figure this out. This makes the residential real estate eligible for beginner investors. Things are different with the commercial and the industrial real estate which have very specific functions and the requirements for them are very specific. As investor you must be familiar with all these requirements in order to estimate if the property will bring you cash flow or not.
The real estate is a wonderful investment vehicle for creation of additional stable source of income. They are stable and predictable and if you haven't done a major mistake it will not take you much of your time to enjoy this additional income. In the most cases a couple of hours monthly are more than enough to monitor your investment. Some call this passive income because it doesn't require much of your time to maintain the investment. The real estate can't however secure you income from your home because you will need to visit them from time to time. If you build decent portfolio size you may use the services of the professional property manager. This will allow you to concentrate entirely on your investment activities.
Despite the many advantages of the real estate I recommend you to learn first how the real estate market functions and to understand its cycles. Learn some strategies for the various phases of the property cycle and them decide where and when to invest. To support you in this stage I have created an online course that is very affordable for my students. I will offer you a coupon with a strong discount for it. Just subscribe for my newsletter and I will send it to you via mail or you could find it in the library section of this web page or simply klick the links above.