5 causes I favor actual property over shares
Should you invest in stocks or real estate? It’s a big question and there are many, many opinions out there.
While both certainly have their pros and cons, I thought I’d give you an idea of why I prefer real estate over stocks.
Of course, investing is different for everyone and it all depends on your personal goals. But for wealth creation and financial independence, I believe real estate is the best and most efficient method.
Here are five reasons why.
Cash in circulation
The main reason I started investing was to replace my clinical income with other sources of income. Financially, I wanted to make sure I wasn’t just relying on medication to take care of myself and my family.
I developed this goal after experiencing some problems at work, and I realized that if I was ever to gain financial freedom, I had to take control of my time and stop trading it for my income.
It wasn’t long before I figured out how much I was making monthly to live the lifestyle I wanted. I just added up my running expenses and made it my ultimate goal to use some other form of income to cover those expenses – not my day job.
It occurred to me that I had met other doctors who had achieved this goal through real estate investments. As you may have guessed, I’ve decided to follow in their footsteps.
Of course, I weighed this decision heavily against the traditional wisdom of investing in the stock market. Obviously, stock values can go up. Although my 401 (k) and Roth IRAs went up and down in value, they increased in value overall.
Still, it wasn’t money to support my family with. Exactly the opposite; On these protected accounts, I would have to pay a fine to withdraw these funds early or just wait until I am 59.5 years old. I didn’t agree to wait that long.
There are stocks that do pay off marginally, but I’ve found that the portfolio size required to generate meaningful cash flow from those dividends just isn’t practical. Plus, they weren’t as predictable as the cash flow I received monthly from my real estate investments.
So I built a real estate portfolio using both direct property ownership and passive investing through private deals like syndications and funds. It’s not a get rich program, but with the income from my day-to-day work, I’ve been able to turn a good portion of it into passive income investments and cash flow production.
That cash flow, each building an investment, allowed me to buy back my time. This enabled me to give up shifts and knew that the income from my passive investments was reliable. This was the biggest benefit of investing in real estate and it’s growing and paying off to this day.
I know that in the past the stock market has appreciated year after year, an average of 7-10% per year. So I understand when people just want to park their money there and forget about it (according to many, this is the smart way to gamble on the stock market).
However, the fact that it is an extremely efficient market means that as a small person you are not going to beat professional investors with all of the information it takes to take the big strides and make huge profits in the stock market.
Do not get me wrong; I know some investors (and some doctors in particular) who have traded quite well in stocks. You have succeeded because of intelligence, strategy, and a little luck. However, these results are not typical – especially for someone who does not observe and study the market very closely.
However, the real estate world is a very inefficient market. This means that while property prices appear to be driven by the overall market, the reality is that much investment property is not bought and sold for real value.
You can find tons of great offers in many different situations. For example, the seller may be a mom and pop owner who did not run the property with maximum operational efficiency and is now selling to pay it off. The following buyer and owner can then buy the property at market value and create added value themselves.
This control really allows you to make profits based on your skills and efforts, rather than timing and luck.
When you buy a stock, unless you are someone like Carl Icahn or Warren Buffett, you are very unlikely to have any control over the stock price. You’re more or less just for the ride.
However, as mentioned above, a real estate investor can use a strategy to improve business operations and create what is known as “forced appreciation”.
This is different from “market appreciation,” which is determined by general market factors such as the global and local economies. It’s based on comparative data (how other things work in the region) and as an investor it is simply not under your control. You can look at trends, but even they are unpredictable.
A good way to force appreciation is to take units that rent below average because they are in relatively poor shape compared to the market, renovate those units and get a much higher rent.
It is also possible to reduce costs through more strategic overall management. You may find a property manager who has better resources to help maintain the building at a better price. By taking better care of tenants, you may get less sales and the repairs / repairs that come with it.
Changes like these lead to a higher operating profit, which in turn can significantly increase the value of the property – regardless of what the overall market for the property is doing.
You simply don’t have this option with stocks.
Leverage is one of the most powerful aspects of real estate investments. You can control 100% of an asset by using only a smaller portion of the capital (e.g. 20% of the property’s value) and the remainder by using a lender’s capital. However, as an investor, you receive 100% of the upside potential of the investment.
Let me show you why this is powerful.
For example, suppose you buy a $ 1 million rental property by investing $ 250,000 in a property and borrowing $ 750,000. Market and forced appreciation can add 25% to the value of the property, so it’s now worth $ 1.25 million. That’s a 25% increase for you as an investor, isn’t it? Well, it’s actually a 100% ROI.
Remember, you only invested $ 250,000 and the property has increased in value by 25% or $ 250,000. Based on the return on investment formula (return ÷ amount you invested) this means a 100% increase.
That is the power of leverage. This is how investors can make oversized profits and create massive wealth.
Leverage is of course a double-edged sword. It can multiply returns, but it can also increase losses. That is why it is absolutely important to minimize the risk and understand the cons. Again, since real estate is an inefficient market, it is possible to mitigate this risk.
Because real estate allows the level of control discussed earlier, you can employ a solid strategy to not only mitigate risk, but prepare for higher returns.
Sure, with stocks, there is some way to leverage leverage through a margin account. However, these are intended for short term gaming and you are likely to come across something called a “margin call”. In this scenario, the investor must raise capital to cover the borrowed loans immediately. It’s not a long-term solution and can be extremely risky.
Investing in real estate brings numerous tax benefits – too many to list here (see this post for more information).
Suffice it to say that there are many, many amazing tax breaks available to real estate investors. These are not gaps, but rather government incentives to encourage property ownership. After all, it serves a need by providing housing, jobs, and income to local governments.
Probably the greatest tax advantages are depreciation and 1031 stock exchanges.
As a rule, rental properties are depreciated by 3.636% annually (for residential properties up to 27.5 years). This depreciation can be deducted from your reported income, which can significantly reduce the amount of tax you owe for the year.
For example, let’s say you bought a rental property for $ 400,000. A quick method would be to divide the purchase amount by the maximum depreciation years (27.5). This way you can offset your passive profits by $ 14,500 each year.
With the laws in force, you can use what is known as bonus depreciation to accelerate depreciation for a large part of the property, resulting in a massive deduction in the first year of property ownership.
This tax advantage is passed on to you both as the direct owner of the property and as a passive investor in a syndication or fund.
With a 1031 exchange, you can postpone capital gains tax indefinitely. Typically, you would have to pay a very high amount of tax on selling an investment property. However, if you use the money from that sale to buy another property, it is considered a “swap” by the IRS.
In other words, you can essentially postpone paying capital gains taxes forever by simply using the profits of a sale to purchase a property of equal or lesser value. This is a powerful tax break for real estate investors.
When it comes to stocks, you can get some tax breaks from qualifying dividends and certain write-offs. However, they all pale in comparison to the massive benefits you get from real estate investing.
These five advantages are some of the main reasons I chose (and continue to do) real estate over stocks to create financial freedom. Real estate enables significant wealth creation (and maintenance if that’s your goal) and creates an amazing source of extra income for me and many other doctors.
Don’t get me wrong, I still have some investments in the market, but this is just for diversification (as you know, I’m a huge fan of diversification).
But since my ultimate goal is now to generate income for financial freedom and to live the way I want to live, I believe real estate is the best way to get there – for myself and for many others.
Was Real Estate the Best Choice for You? Or has another route proven successful for you? Let me know in the comments.