Top 5 Reasons to Invest in Real Estate Instead of Paper Assets

1) CONTROL - Many money managers will advise you to diversify your investments in paper assets such as mutual funds and cd's. Yet as investors search for investments with lower risk, they increase the level of risk for themselves by investing mainly in mutual funds. The problem being you have no real control over the assets value since you cannot renovate or improve its value like you would real estate. You cannot control the risk of the asset like you could with real estate by using creative legal structuring, having proper insurance, or protecting yourself against economic cycles through positive cash flow. Due to the lack of control of the asset, mutual funds are some of the worst investments available. On the other hand, real estate can be controlled much easier by investing correctly in assets that are under market value with multiple exit strategies that help increase the return on the investment while decreasing the risk. An increase return on an investment does NOT have to mean an increase in risk.

(2) INFLATION - Paper assets do not have inflation protection. With all of the "funny money" the U.S. government has printed in the past couple of years our economy is in shambles. Just look at the price we pay for commodities and gasoline, inflation is already happening. People’s paper assets primarily stay the same while everything else goes up in value, so most investors are losing money and being left behind by not investing in assets that keep up with inflation. Real estate value generaly goes up even though the demand for it stays the same thus keeping up with inflation, regardless of how much the dollar weakens. By investing in real estate you diversify into another asset class instead of the U.S. dollar which since 1971 is considered one of the worst investments of our time.

(3) DEPRECIATION - Paper asset income does not come with tax benefits like real estate even though taxes are one of our biggest expenses in life. Learning ways to reduce taxes is extremely important, especially in our current economic time. Reducing the taxes you pay to financial predators such as the U.S. government will help you get ahead financially. It's their job to find additional ways to tax you and it’s your job to find ways to reduce or even eliminate those taxes. When investing in real estate you get depreciation benefits which topically equal 60%-80% of your purchasing price divided by 27.5 years. For example, if you purchase a property for $100,000, then $80,000 (depending on the land value) is written off over 27.5 years, which means you get a $2,909 tax deduction on any income that property produces. So if you make $8,000 per year in rental income you are only paying taxes on approximately $5,000 instead of the original $8,000, which is huge when compared to other investments.

(4) LEVERAGE - Rarely can you use leverage with paper assets to borrow money against them and increase your return on investment. When using leverage, assuming it done correctly, you can increase your returns. With paper assets using leverage is extremely risky since there is no control. That's why financial planner and advisors will tell you leverage is risky. However, it's only risky on assets you have no control over or when you over leverage without looking at the cash flow closely after debt service. If you purchase the same $100,000 property (in point 3 above) but get an $80,000 loan at 5.5% for 30 years and put 20% down you now have a monthly payment of $454 per month leaving you with $213 per month in positive passive cash flow ($8,000 / 12 months = $667 - $454 payment = $213).  That means on your $20,000 you are making $2,556 per year or a 12.7% return on investment instead of an 8% return on investment on your $100,000.  Using leverage correctly is a great way to increase returns which is extremely necessary in an inflationary economy.

(5) CASH FLOW - Most paper assets do not produce positive monthly cash flow.  Cash flow is everything.  When you invest in most paper assets you typically invest for capital gains, not cash flow.  Capital gain investment income has higher taxes and do not provide you income when the economy is doing poorly.  You can easily lose your investment or a large percentage of it, like we saw when most American's retirement and 401k accounts lost 40%.  If you invest in cash flow, the value of the property does not matter.  You are seeing your return on investment on the cash flow and no matter what is happening in the economy you are not in danger of losing the asset or your initial investment.  You will typically see your cash flow come rain or shine even with fluctuations in the general overall economy. However, you are much less susceptible to economic fluctuations if you are prepared. By building your cash flow stream over multiple asset classes you will be in a much better financial position where your monthly expenses will be covered by the cash flow. As your expenses rise with inflation so does your cash flow due to rental inflation as well.

Credit to bigpocket.com

If you are thinking about selling your home or wonder how much your home is worth, contact me. If you have friend and family member that is interested in buying or selling thier home, please keep me in mind!                 cell: 302-290-1375 office 302-631-1648 e-mail pam.covey@foxroach.com