For many people who want to prepare for the future, individual retirement accounts (IRA), 401(k) plans and qualified tuition plans all make excellent ways to put money aside. However, these have limitations for investors who are looking for tangible returns in a timely manner. Investing in real estate and the stock market are both popular, for different purposes. Here are several reasons why real estate investing gives you perks that investing in stocks lacks.
Investing in real estate gives more leverage. For example, let’s say you buy a property by putting down $20,000 and by financing the balance. This gives you a house that is worth approximately $100,000.
If you buy stocks with this $20,000 instead, you can use them as collateral and borrow the same amount of money. You now have $40,000. In a nutshell, owning real estate allows for more leverage, especially when taking longer time periods into consideration.
Investors can apply depreciation when owning rental properties. In time, this reduces the tax burden because of how the IRS treats these assets. However, mutual funds and stocks can’t be depreciated. You can only list them in tax-deferred accounts, but rental properties fulfill that requirement as well.
One of the biggest reasons why people like real estate is because it’s a tangible asset. Investors like to see what they own, and they like improving the quality of housing so that it’s worth more money. Since better housing generates higher rent amounts, this improves the value of the real estate. Investors can harvest these profits by refinancing the property or by taking out new loans.
Buyers can use this additional money and invest it in other houses. If the investor repeats this process every few years, he can relatively quickly increase his portfolio and own five or even more properties in a 10-year period. All these would be financed indirectly by the first purchase. Since it takes only approximately 20 percent of a home’s price to acquire a mortgage, an investment of $100,000 can lead to a real estate portfolio of approximately $500,000.
The purchase of single-family rental homes gives people the opportunity to enjoy these three benefits. Additionally, selling a home at the right time can lead to greater profits when compared to alternative investments.