Despite the millions of dollars investors have made in the stock market, there are distinct advantages to real estate investment . Real estate investing for profit is in fact is one of the most popular approaches to generating additional income in the United States today.
In this article, we’ll consider a few examples to illustrate why careful and intelligent real estate investment might make better sense to an investor than stocks. Before we get started, though, it should be mentioned that investing in real property is not a bed of roses without risk, and does include several downsides worth understanding.
Real Estate Investment Downside
- Liquidity – Real property typically cannot be converted to cash overnight. Whereas stocks can be sold with a phone call, the process of liquidating equity in a real estate investment can take months.
- Slow Market Reaction – Real property has a slower reaction time than the stock market and therefore requires more patience on the part of investors. Whereas the ups and downs of stocks are in real time and thereby allow you to gauge your gains or losses minute-by-minute, this is not the case with real estate investing. You might have to wait months (probably years) before you discover the real worth of your investment.
- Less Certainty about Market Value – The stock market is more efficient when it comes to market value than investment in real property. When you purchase or sell a stock, for instance, you can be sure that the price was indeed the “correct” price for that stock on that day and at that time because the existing price for the stock incorporates and reflects all relevant available information about the company such as earnings. This is not the case with real estate value. The buyer and seller must discover the correct value on their own, whether it is too high or too low. This, of course, is why experienced investors research the local market and use real estate investment software to run and rerun the numbers.
Real Estate Investment Upside
- Leverage – Real property allows you to borrow money to make the purchase; generally not something you can do when buying stocks. Moreover, the stock market, by law, limits the amount of leverage (margin) you can use to buy stock whereas there are no such limits with real estate. You can purchase investment property with a small amount of your own money without any constraint other than a lender’s willingness to fund the property.
- You Can Purchase under Market Value – It’s generally tough to find “under valued” stock on a regular basis, whereas-especially in this troubled economy-you can purchase properties at discounts far below market value if you dig deep enough.
- You Get the Benefit of Depreciation – One of the beauties about investment property is the tax benefit you get through depreciation deduction (or “cost recovery”). Defined as a loss in value to a property over time as the property is used, depreciation is a non-cash tax shelter deduction in full compliance with the tax code in which the government allows you to assume that the buildings (not the land) are wearing out over time and becoming less valuable, thereby permitting you to take a deduction for that presumed decline in the value of your asset.
- Market Conditions are Localized – Whereas a downturn in the stock market could affect everyone involved wherever they live, barring a national collapse of the economy, home values might drop in one city without affecting property values in other cities. This enables you to protect yourself with a “geographically diversified” portfolio of property investments to hedge against this type of event.
- You Can Control Property Value – Investment property is unlike other investments because its value is mostly controlled by the investor. With some non-superfluous capital improvements and/or diligent property management, investors regularly increase the value of their investment properties. This is not the case with stocks.
Okay, you get the idea. Investing in real estate is a smart and profitable alternative to the stock market. As stated, real estate investment is not a guarantee to riches, and certainly requires more insight and effort than the “gurus” would have you believe. Still, if done correctly, investing in real estate can prove to be one of the smartest investments you could ever make.