Are you thinking of investing in real estate?  I would like you to take the next few minutes to learn the truth about real estate investing and how it compares to other methods of building wealth. I would venture to guess that most investors have probably never had an 'apples to apples' comparison of stocks versus Investment Property quite like the one I’m going to show you here. I constantly hear people say, 'I need to get into real estate investing at some point”, but simply don't know the truth about investing.  Most people will agree that investing in real estate is one of the best ways to accumulate wealth. Unfortunately, most of the same people will never buy a single investment property in their lifetime. The general public has a fear of risk taking and the unknown. People are typically afraid of things that they do not understand. The truth is that real estate investing can be one of the safest investments one can buy. Let me share with you the 7 top reasons why you should be investing in real estate NOW!


Reason 1:
Cash Flow:
Simply stated, this is the difference between the rental income generated from an investment property and the expenses it takes to operate the property. It is the most desirable type of profit in real estate because it provides you with an immediate cash return.

Reason 2:
Leverage: Banks will not typically loan money to buy stocks. Banks will however, compete to loan money to buy Investment Property. Why is that? It has to do with risk management, which we will discuss later. The fact that banks want to loan you money to buy Investment Property creates a situation which we will call LEVERAGE.

Let's assume that you have $10,000 to put into some type of investment. If you choose to buy $10,000 worth of stocks, you will own exactly $10,000 worth of stocks. However, suppose you choose to invest that $10,000 into Investment Property using a 90% mortgage (which in many cases can even go up to 95 or 100% mortgages in today's market), you will own $100,000 worth of Investment Property. If both of your investments were to appreciate by 10%, your actual gain with your stocks would be $1000 where your actual gain with Investment Property would be $10,000. That equates to an actual 10% return on investment vs. a 100% return on investment. That's what we call leverage!


Leverage: Real Estate vs. Stocks
The traditional argument against Investment Property Investing has always been 'I can get an average of 10% from stocks with little effort so why would I invest in Investment Property that only appreciates 6 or 7% per year'? This point-of-view is not taking leverage into account.

If you believe the above statement to be true and compare the actual numbers, the stock investment gained 10% of the initial $10,000 value (or $1000) and the Investment Property investment gained 6% of the initial $100,000 value (or $6000). That is still an actual return of 10% versus 60%. It is not hard to see which investment provides a greater immediate return on investment. Additionally, these numbers do not take into account any positive cash flow and income from your property during the year, or the substantial tax advantages to owning investment property.

Reason 3:
Value: As we mentioned previously, if you invest $10,000 into purchasing stocks, you own $10,000 worth of stocks (a fairly obvious point). If you invest $10,000 into purchasing Investment Property using the leverage of a 90% mortgage, you own $100,000 worth of Investment Property right? Well, only if you paid retail for your property. Anybody that knows anything real estate investing will tell you that there are terrific investment deals to be had. You just have to know where to find them!

What if you purchased a $100,000 property that happened to be worth $110,000 the day you bought it? Does it happen? The answer is absolutely! IN fact, this happens every day in great markets and not so great markets. If you have your eyes open and are willing to 'crunch and analyze the numbers' to find good deals, you will find that they are all around you.

Value: Making money when you buy.
By finding these types of deals you have accomplished two things.

You have added $10,000 to your asset column in the form of equity.

You have created additional LEVERAGE for yourself as the value of your property increases (a 6-10% gain on $100,000 is better than a 6-10% gain on $90,000!) Remember, you make money in Investment Property when you buy, not when you sell.

Reason 4:
Control:

Let's take our assumption one step further. When you buy your $10,000 worth of stocks, what can you do to increase its value? If we follow the previous assumption, you have invested $10,000 using a 90% mortgage to purchase a $100,000 property that has an actual value of $110,000 because you 'found a good deal'. So what can you do to further increase the value of your new $110,000 property?

It is amazing what a cleanup, a little landscaping to add curb appeal, some carpet and a quick paint job can do to increase the value of your property. Only a few hundred dollars well spent can result in huge value gains in Investment Property. I have personally experienced this many times. Your $110,000 property with a little effort could easily be worth $115,000, $120,000 or more virtually overnight! Do you have to do the work yourself? Absolutely not! If you enjoy rehabbing you can do it yourself, but if not, simply hire a handyman or contractor and accept a little lower net gain.

Reason 5:
Tax Benefits:

The tax code in the United States is geared to reward Investors who make housing available to the general population. When you invest in stocks, you are taxed at some of the highest rates in the tax code. When you invest in real estate, it is the exact opposite.  When investing in real estate, you put yourself in one of the best tax positions in the business world.

Lets continue with the above example and say that you have completed your deal with the $10,000 invested with a 90% mortgage to purchase the $100,000 property that appraised for $110,000 (because you 'found a good deal'), which you improved to $115,000 by spending another $1000 on cleanup, etc. Let’ just assume that a year or so passes and the market grew by 6%, your property would now be worth $122,000. Not bad, right?

Let's do the numbers. You have a mortgage at current rates that started at $90,000 and after a year worth of payments (the majority of which are tax deductible) you still owe approximately $89,000. However, your property is now worth approximately $122,000. If you were to refinance at 90% once again, you would take out a new mortgage of approximately $110,000. This will leave you with approximately $21,000 in cash in your pocket. Now, the BIG question; do you have to pay any on those proceeds?  Absolutely not! Loan proceeds are not taxable! You have not sold the property or realized a 'capital gain'. You have simply borrowed money from yourself. You are able to do what you wish with that money, free from any taxes whatsoever. Obviously, a sound strategy would be to purchase two more properties just like the first one you did! I grew my real estate business very quickly by using my refinance/cashout profits from property ‘A’ to buy Property ‘B’, and the profits from property ‘B’ to buy property ‘C’ and so on and so on.

Here is something else to think about.  We have not taken into account the fact that ALL of your interest payments on this property are tax deductible. In addition, you are also able to depreciate the property itself and all of its contents for additional tax advantages if you choose to do so.

Let's compare the Investment Property tax position with the stock scenario. Assume that the $10,000 initial stock investment grew by 10% in the first year, creating a gain of $1000 and you wish to access it. If you draw it out, you will pay from 20-28% (or higher) in capital gains tax in order to have access to your money in this situation. This reduces your net gain to $800 (actual 8%) or less, depending on your personal tax situation. Compare that to Investment Property and you are beginning to get the picture!

Reason 6:
Limit Your Exposure To Risk:
Risk Management: Do you remember at the top when we said that banks would compete to loan you money on Investment Property? The answer to the 'why' is very simple. Low Risk. Banks incur little if any risk when loaning money on Investment Property due to the steady, solid growth rate of the real estate market over a period of time, as well as the fact that if you default on your payments they will simply foreclose on the property and sell it to someone else. This is in direct contrast to the stock market, which can be quite volatile and experience sharp increases and decreases in value daily. The bottom line is that banks realize that a property isn't going anywhere. It’s not that Investment Property markets don't ever go down and experience market corrections from time to time.  However the dips are much less dramatic than that which can take place in the stock market, proven by the banks' willingness to loan money on property.

Reason 7:
Protecting your peace of mind:
Finally, Now that we understand the value of leverage and risk management we realize that a 6% Investment Property gain 'beats the pants off' a 10% stock gain in actual return on investment by a wide margin (approximately 50%, not taking into account several factors that can increase this number such as tax advantages, income on property etc.) Bottom Line….owning good solid Investment Property in the right areas is a smart move in the right direction when it comes to creating wealth!

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