Here’s why real estate is a better investment than stocks.
What makes real estate a better investment than stocks?
With a stock, you do have leverage—it’s called ‘margin. When you buy on margin, you have options. You can use $1 to control $10 and own 10% of the stock. However, whenever you have a downdraft on the stock and it decreases by, say, 10% to 15%, that’s a margin call. If you don’t meet that margin call, you get wiped out.
How does this compare to the 2008 real estate market? If a loan is underwritten properly based on the income of the investor or homeowner, they’ll most likely be able to keep that home. Except for those with 100% financing, people just walk away because the value has dropped 50% or 100%. This is what’s known as a ‘liar loan.’ The point is, you don’t have to sell your home if you don’t need to.
Secondly, the real estate tax code is around 6,000 pages, and out of those 6,000 pages, only 30 talk about the tax rate, or how much you have to pay in taxes. The rest of the pages talk about tax incentives, write-offs, and stuff like that. As a homeowner, you can use tax laws to your advantage.
Another thing real estate has that stocks don’t is depreciation. You can depreciate 80% of the value of one to four residential properties or apartments over the course of 27.5 years (roughly 3.64% each year). You can’t depreciate the total; you can only depreciate roughly 80% of the value that you purchase. The remaining 20% is still on the land. For condos, you can depreciate up to 95% because the land has no value—the property is in a building. Over the past 35 years, homes have appreciated by an average of about 6%, so while your property appreciates by that number, it’s depreciating by 3.64%. That’s a deduction you can write off, which means less of a tax payment from your income.
For example, if you have a net of $10,000 for an investment property you purchased for $500,000 and $400,000 of that represents the building. In 27.5 years, you can depreciate roughly $12,000, so that $10,000 is tax-free. You also have $2,000 left over for other write-offs.
That’s the beauty of using tax law to help you amplify your cash return. I hope this helps you understand why real estate is superior to stocks, how you can create wealth through real estate, and why you don’t just have to save money for your retirement. That’s the velocity of money effect—once you earn some money, you can buy real estate to earn more money and take advantage of tax breaks.
As always, if you have questions about this or any real estate topic, don’t hesitate to call, text, or email me. I’d love to help you.