16 Reasons Real Estate Investment Is Better Than Stocks

The last week, the roller coaster of the stock market has not only reminded me why diversification in any portfolio is important, and also, that real estate is still a better bet than stocks.

But, if you buy a duplex that makes financial sense in the first place (and don’t speculate on appreciation), here are 16 reasons investment property is a wise move:

1. People Need A Place To Live. There is a shortage of housing almost everywhere in the country. Sky-high costs have forced most of the new construction multi-family properties to be targeted for the luxury market. Existing multi-family rentals remain the affordable option for the rest of the country’s tenants.
2. The Down Payment Can Be Really Low. If you choose to owner-occupy a duplex, you can take advantage of the 3.5 percent minimum down payment required for an FHA loan.
3. You Can Live In It For Less Than The Cost of Rent. Nearly every buyer I’ve worked with who has bought a duplex to live in saves at least $300 a month by paying “rent” to themselves, rather than a landlord.
4. The Bank Will Lend You Money To Buy It. Banks must think real estate is a pretty good investment. After all, if you put up a little of your own money as a down payment, the bank will let you use theirs for the rest. They won’t agree to that arrangement at all when it comes to your stock portfolio.
5. Thanks To Leverage, You Can Buy More Than One.  Banks don’t require you to pay off one duplex before buying the next. If you qualify for the mortgages, you can buy several properties with anywhere from 3.5 -25% down. You can use the bank’s money for the rest!
6. Interest Rates Are At Historical Lows. Not only can you use other people’s money to buy an investment property, but you don’t have to pay them much for the use of that cash either. In fact, doesn’t it make better sense to pay someone 3-4 percent to use their money to make a double-digit rate of return on yours?
7. Interest Rates Are Still Tax Deductible. (Tax Savings!) From time to time there’s been talk in Washington of reducing or eliminating the mortgage interest deduction, for now, the IRS still allows you to deduct a percent of the total interest you pay on your property.
8. Depreciation. (Tax Savings!) The IRS allows you to take a depreciation credit on your duplex, which is something you can’t do with either stocks or your single family home. This helps reduce your taxes.
9. Positive Cash Flow. Thanks to very low-interest rates, duplexes that seem expensive at first glance may actually cash flow. This means that after the owner has paid the mortgage and all expenses associated with the property, there’s money left over to spend or save. Whether you use this extra money to buy stocks, save to acquire another duplex or even simply go on vacation, you end up ahead.
10. Tenants Buy You The Property. If you efficiently manage your duplex, the rental income you generate should easily cover your mortgage and expenses. Even if your duplex never goes up in value, at the end of the mortgage, you will have the equivalent of the original purchase price in equity — kind of like a savings account.
11. You Control The Results.  While we can’t control everything in life, you can reasonably manage the outcome of your rental units by making sure they’re well maintained, clean and a terrific value. That way you won’t have any difficulty keeping your duplex’s rental units occupied and generating rent. When my stock portfolio goes down in value, I can’t do anything about it. When my rental unit is vacant, however, I can pick up a paint brush and get busy.
12. Duplex Investing Isn’t Subject To The Emotions Of Others. Have you ever noticed how feelings like fear and hope seem to drive the stock market? One day, there’s fear of an economic meltdown and stocks tumble. The next, a jobs report offers cautious reason for optimism, and they rally? Rental income isn’t like that. People need a place to live, and will always need a place to live, regardless of what others are afraid might happen.
13. You Can Buy Real Estate With Your Self-Directed IRA. Even if you don’t have enough in your savings account, you may have enough socked away in your retirement account to buy a duplex and realize a larger return than you’re getting with Wall Street.
14. You Can 1031 Exchange To Defer Taxes. Thanks to a device called a Starker or 1031 Tax-Deferred Exchange, you can sell, continue to invest, and not pay capital gains taxes until you decide you no longer wish to be a real estate investor. There are very stringent rules to follow, so be sure to speak with an experienced investment property Realtor and your tax advisor before taking this on.
15. With Rare Exception, Property Almost Always Goes Up In Value . With the exceptions of the Great Recession and the Great Depression, real estate has historically gone up value. While no one can predict how much or fast, it’s an added bonus to all of the other great benefits of owning rental property.
16. When You Total the Cash Flow, Principal Paydown, Tax Savings And Appreciation And Divide By Your Down Payment, The Returns Can’t Be Beat! Until recently, the stock market produced double-digit returns for most investors portfolios. Everyone thought that was great until last week, when the good times ended. Here’s the thing: real estate produces double-digit returns even if the property goes down in value thanks to cash flow, principal paydown and tax savings.

In other words, if you buy it right, you can count on real estate as an investment, regardless of what the economy’s doing.

If you’d like to diversify your portfolio through real estate, give me a call.