September 30, 2009
Real Estate Investing Vs. The Stock Market
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Today's investment markets offer investors a wide variety of options. One of the most rewarding opportunities is real estate investing, which can produce a very good income stream. If you choose to become a real estate investor, you will enjoy several benefits not associated with other types of investment.
First of all, investing in real estate has the enormous benefit of financial leverage. Even if you borrow the money for your real estate investing from a bank you can often get into a deal with a 10% down payment which means your returns are instantly magnified due to the fact that you are earning on the bank's 90% contribution as well. As an example, let's assume you have $10,000 to invest and you get 10% return on your investment regardless of the vehicle. If you put it into the stock market you will buy $10,000 worth of shares and after 12 months your investment is worth $11,000. If you put that same money into real estate with a 90% loan you earn 10% on the full $100,000 investment and finish with $110,000.
So your $10,000 has been doubled in the real estate investment above whereas it only produced an extra $1,000 in the stock market. Why? Because your lender's money has been working for you too. This is the power of leverage and is one of the biggest advantages of real estate investing. And yet there are even more reasons to become a real estate investor as you will see.
Another incredible reason to begin investing in real estate is the tax benefits. One of the best tax breaks of real estate investing is the REQUIRED depreciation by the IRS on the property. This represents a "paper loss" when in most cases the property (including the land) is actually appreciating. So in essence you pay taxes on a reported profit figure that is significantly lower than your actual earnings – very nice.
Perhaps an even better tax benefit is the 1031 exchange as defined by section 1031 of the Internal Revenue Code. Essentially this allows investors to delay paying any capital gains taxes when a property is sold as long as the proceeds are reinvested in an appropriate property. The government is basically encouraging investors to stay in the market with this fantastic incentive.
One final benefit of investing in real estate worth mentioning here is the flexibility of sale contracts. Unlike the stock market you can get very creative with your offers. You can exchange virtually anything for a property instead of cash which can mean greater returns and some spectacular win-win arrangements.
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Comments on Real Estate Investing Vs. The Stock Market »
You nailed it. It's all about leverage and the amazing tax benefits. Properly chosen real estate hands down smokes stocks.
The tax advantages make real estate such a good investment. I would make sure not to over leverage anytime just look at what happened to so many people right now.
Take real estate and stock with a pro forma of 5 years. Add the depreciation, potential rental income, and conservative appreciation and it will outgain a stock anyday.
Had always been advised that stocks were the better risk, but where housing prices are now, I might have to re-think this, especially if I have time to let the investment mature.
I would take real estate over stocks anyday. While both will fluctuate real estate is real property which there only is so much of in this world.
I truly agree with you. Real estate investing over the long haul is more beneficial. Remember…there is not just one financial benefits for real estate investment…there are four financial benefits from investing in real estate. Keep up the good work. Knowledge is power. It is important to have the knowledge so you can have an informed opinion before you buy. It is then that you are really investing, and not just guessing.
My wife is a real estate investor and I trade stocks, so this argument is a common one around our house. The tax benefits and leverage are certainly huge with REI. Personally though I love the liquidity of the markets, how I can buy a position for a day and make some money, or sell if my investment loses a couple hundred dollars and be free of the worry of a declining market. In the end I think it depends on which is right for your personality.
You gotta love a real estate investment. Unlike the stock market, it can't disappear into thin air. You will always have something!