In my opinion, real estate is unique in that it is one of the safest investments and yet offers some of the highest rates of return.  The reason this is true is has to do with the fundamental nature of real property (land, buildings, etc.) and the tax advantages (see Real Estate Tax Advantages) only real estate offers.  I will briefly cover each of the advantages below and provide links to other sources of information in case you want to go deeper.

Low Risk

I have personally purchased stocks that become worthless paper but I have never seen or heard of real estate that become worthless. Why else would banks be willing to lend money over a 30 year period? Real estate always has value, no matter what the economy does. Also, do not confuse speculation with investment. What investors did in Las Vegas and most areas of the country in the last few years was speculation, not investment. Money was thrown at real estate (and many other “investments”) without rational thought.  Most knew that what they were doing made little sense but the market was in frenzy and “everyone was doing it”.  The frenzy came to an abrupt halt when reality came crashing down.  So, when I talk about investors, I am talking about people who base their decisions on analytics and common sense which was largely absent during this period. 

What if you bought a property in 2005 that met the basic analytics and common sense test? You would likely be ok.  Why?  Because if the property was profitable in 2005, it is probably more profitable today since rents have increased in Las Vegas.  Would you get hurt if you sold now?  Yes.  But, if you are making a good profit on the property why would you sell now?  People are selling now because they have to, not because they want to.  Every investment has risk but real estate is one of the lowest.

The Average Person Can Do It

I know of many average people who made a lot of money in real estate. These were not people who started with a fortune and expanded it. These were everyday people like you and me who started small and accumulated properties over a period of several years. You have to know what you are doing but it is not that difficult. It requires more patience than brilliance. As to stocks, I have met only one person who accumulated wealth through stocks and he states it was as much luck as skill.

No Personal Management Required

Don't want to fix toilets and respond to late night calls from tenants? Good. Not only do you not want to manage the properties your self, I strongly recommend against it. Managing rental properties requires processes and skills that few individuals have. All my clients, except one, depend on professional property managers. The property manager I normally work with only charges my clients 7% (compare to the typical 10%) and is excellent at the most critical aspect of property management: getting the right tenant in the property. So, you can successfully own rental property whether you live in Las Vegas or Katmandu since you never manage it yourself.

Leverage

With stocks, if you have $100,000 to invest you can buy $100,000 in stocks. If you earn a 5% return per year, in 5 years the (compounded) value would be $128,000. However, putting 10% down and financing the balance you could purchase $500,000 in real estate. The (compounded) value of the $500,000 (minus the cost of money at 6% over a 30 year fully amortized loan) would be approximately $641,000. See right for how I calculated this. Note that the way I calculated this is far too simplified and anyone with knowledge of accounting would not like my approach. However, the difference ($28,000 gain from a stock vs. over $500,000 gain with real estate) is so large that errors in my assumptions are not all that relevant. Plus, I did not assume any rental income!

Note than while leverage is a powerful investment tool, it is a double edged blade.  It can help or hurt you.  Variable rate loans and over financing of investment properties can be deadly as evidenced by the current international situation.  However, used intelligently, financing can enable you to leverage your investment dollar for a far higher rate of return.   

Part of your investment team should be someone who knows your tax situation and can advise what steps to take. These days taxes can have a huge impact on whether an investment makes sense or if it is a terrible idea. I have no knowledge of taxes and can not advise you in this area.

Tax Advantages

This is such an important aspect of real estate investment that I have a seperate page just for taxes. Please see Real Estate Tax Advantages.

Call me today for your real estate investment needs, you will be glad you did.

Eric Fernwood
702-358-8884
EricFernwood@Gmail.com