Feb 7

Feb 7 7 Reasons to Invest in Real Estate

Why Invest in Real Estate?

There are lots of ways people can invest to grow their asset. 90% of all millionaires said owning real estate is an important part of their wealth creation. Here are the top 7 reasons why people choose to invest in real estate.

Control
Tangible Assets
Depreciation
Leverage
1031 Exchange
Inefficient Market
Less Volatility

Let’s go into more details one by one:

1. Control

For stocks, as a normal shareholder, we are way down the line of influencing the decisions. Your shares could be easily diluted.

For Real Estate, you are the CEO & Board of directors. You decide on what to buy and how much to spend. What renovations and how much debt, which residents and contractors, how to manage and when to sell.

However, if you don’t have the time or acumen, it could be a double-sided sword. Having a lot of real estate could be disastrous.

2. Tangible Asset

It is a tangible things that you can go feel and touch. For basically human psychology, people feel better when they can actually see the things they own or investing in.

3. Depreciations

cost segregation study to accelerate your depreciation from 27.5 years to 20 years.

Here is one example to illustrate the impact of depreciation on your investment:

4. Leverage

Borrow other people’s money and let them work for you.

For example if you buy a house (1) all cash (2) with 60% leverage (doing 60% leverage is pretty standard)

For a $100,000 investment, if your first-year return is 10,000 and interest rate is 5%.

for scenario (1), your return rate on your cash is $10,000/$100,000=10%

for scenario (2), you return rate on your cash is ($10,000-$100,000*60%*5%)/($100,000*40%)=$7,000/$40,000=17.5%

leverage can increase your gain by 75% in the above example

For details regarding leveraging debt finance to boost your returns, you can refer to the article here.

5. 1031 exchange

A properly structured 1031 exchange allows an investors to sell property, to reinvest the proceeds in a new property and to defer all capital gain taxes.

A 1031 Exchange is a 0% interest rate loan that you don’t have to pay back if you hold it until you die.

A leveraged 1031 exchange increase gain tremendously

6. Inefficient Market

Here is the efficiency market hypothesis: It is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

Stock market is very efficient, while small residential market you can still beat the market or spot opportunities that big guys don’t bother.

7. Less Volatility

Largest home price decreases typically less than 5% while largest stock price decreases in any given year can be 20%+ - Forbes ‘Real Estate V. Stocks’, 2015

Why Residential Real Estate?

Let’s explore the opportunity of investing in some other real estate types

1. Invest in Office buildings?

Working from home or remotely. It is a trend that is growing
15%-20% of employees are willing to forgo compensation for flexibility
Remote work of 4-5 days increase 31% and 24% in 2018

2. Invest in Retail Center?

Consider the impact of Amazon, online and e-commerce is destroying retails

3. Invest in industrial warehouse space?

When there is economic downturns, this type of asset will get hit seriously
Complicated to choose locations and management strategies

4. Demand for residential rentals increasing faster than ever

People always need a place to live
More flex for relocations due to job changes
Cultural changes. People are renting and sharing everything. It is a commodity now.
A life style change or stage of life thing (people who are looking for SFR are different from people looking for condos)
63% homeownership rate is a 50 year low and is still falling
Look for household index increase
Understand risk
- Disaster Risk including earthquake
- Rent Control which limit the value of your property