To someone new to real estate, it may seem as though there is a small but devoted group of people who passionately believe that real estate is the best investment out there. And yet when you look at the statistics, only a relatively small portion of the investing public invests in real estate-most investments are in stocks, bonds, certificate of deposit and their derivatives such as options and future contracts.
Why is it that real estate investors believe so passionately in their investment vehicle? landed property offers advantages over almost all other investments of such a magnitude that when you understand them, it is difficult to get excited about any investments other than real estate. These advantages can be categorized under the following headings:
1. Leverage: When you buy stocks, bonds, certificates of deposit, treasury bills, or most other investments, you have to put up the purchase price in cash. Some sophisticated investors manage to buy stocks on margin, but this only applies to a relatively small number of stocks, a limited percentage of their worth at acquisition, and a limited number of investors. Most stock market investors put up the entire purchase price in cash. This contrast with real estate, where most buyers get a mortgage, be it for an owner occupied home or an investment property. Consequently, a $50,000 lump of cash will buy exactly $50,000 worth of stocks for most investors, but easily $500,000 worth of properties for real estate investors. The effect of this leverage is that gains/losses are magnified through this leverage or gearing.
2. No Cash Requirement: Related to leverage is the reality that even if the bank only gives you 90% or even 80% of the purchase price in the form of a mortgage, you do not necessarily have to come up with the difference in cash. You may easily negotiate a seller-carry-back loan (sometimes called vendor-finance), used equity in another property, arrange a second mortgage effect improvements between signing the contract and closing that increased the value, or implement any of a number of other techniques to enable you to acquire real estate without having any money.
3. Buy Below market value: Most investments have standard market values at any point in time, and efficient market to buy and sell such investments. Therefore, properties may be sold at their true market values (many are), but many properties are sold at more than market value (the buyers pay too much) and by the same token many properties are sold at way below market value. Thus, with real estate, you can consistently acquire assets at way below their true market or appraisal values. This is a tremendous opportunity to instantly gain huge amounts of equity for the mere effort of looking around.
4. Improvements: When you buy stocks or bonds, what can you possibly do to increase the value of your investment other than hoping and buying as many as the products and services as the companies produce? With real estate on the other hand, there are countless things you can do to increase the value way beyond the cost of the improvements.
5. Capitalizing On Gains: When your stock portfolio, gold or most other assets double in value, in order to benefit from that increase, you generally have to sell the asset, or if feasible at least, a portion of it and then suffer the capital gains tax consequences. When your real estate doubles in value, you do not have to sell at all. You simply go back to the bank and refinance. By refinancing, you retain the asset which is still going up in value and which still generates an income indexed for inflation.