After 35 years of investing I have found the 4 reasons real estate is better than stocks for building wealth and I’ll show you why.
Investing in properties is a sure thing, investing in only stocks gets you a piece of paper which is not guaranteed and here’s why:
1. Leverage
Because apartments provide dependable income, an investor can use $250,000 to buy $1,000,000 worth of cash positive real estate. Stock investors can’t and shouldn’t use leverage when buying stocks. Leverage is the ultimate way to create wealth and in the case of apartment debt, unlike homeowner or consumer (bad) debt, the tenants pay off the mortgage over time.
2. Depreciation
It’s no secret that real estate offers the last refuge for tax write-offs. In one year, employing bonus depreciation laws, we can often write off 24% of the real property value against other investment income. This is a tremendous advantage over stocks for high earners and probably one of the main reasons why Donald Trump doesn’t want to show his income tax returns.
3. Dependable Cash Flow
With banks paying people with savings accounts just over zero interest (.18%) and dividend yields of the once-classic dividend stocks being terminated or cut to almost nothing (GE, Disney, etc.) real estate offers consistent cash flow at 5-7% annualized which is about 50 times what banks are paying on a savings account right now.
4. Durability
Technology is killing off companies. While the average company in America used to have a lifespan of 60 years, these days it’s not uncommon to see a high-flyer disappear in a flash. Large apartment complexes can produce income for decades and are very difficult to replace due to regulations and their cost to rebuild. While the media pours attention on the high flyers, the reality is that the stock market has more losers than winners; GE was delisted from S&P, Lehman almost took the world down. Remember Blockbuster, Eastman Kodak, and Victoria’s Secret…? Then it seems the airlines file bankruptcy every ten years or so. Ford and GM are both operating at a fraction of their all time high. Meanwhile, apartments in cities across America continue to provide cash flow and appreciate in value through both good times and bad times.
The negatives of apartments versus stocks:
You can’t just go buy an apartment deal. Schwab or Fidelity will let even an idiot buy a stock, but to find a property, get funding and manage it requires an experienced investor resume, liquidity, property management skills and more work, which reduces the buyer pool. Also the real estate investment is not as liquid. While one stock can trade a million shares in a minute, an apartment with long-term debt won’t trade for years.
Maybe that’s why they last longer.
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Be great,
–GC
