Is Real Estate Investing For You?

This list will help you find out

Real estate investing sounds cool. Even better, it’s simple to understand.

As simple as the asset class is to understand, it also has a lot of moving parts that make would-be investors hesitant to jump in. You may be wondering about the advantages and disadvantages of placing your money in a physical asset.

In this essay I’m going to break down how you can determine if real estate investing is for you. I should mention that this applies to people that want to directly own income-producing real estate. Some of these points will not be relevant if you choose to invest in a fund or speculate on price appreciation in flipping property.

You care about how you are taxed

Real estate is perfect for people who are conscious about their tax bill and want to take steps to reduce it. Income producing property does produce income. People that buy income producing real estate care equally if not more about how their income is taxes as they do about how much the income they receive. Real estate income is taxed as passive income which is taxed more favorably than earned income.

If you are looking for ways to generate income but without a huge tax burden then real estate investing could be for you.

Recurring revenue is important

Consistent, recurring income is one of the key benefits of income producing real estate. It’s like having a long-term contract for a year of income (or longer!). Other businesses require you to sell customers each month. With real estate, the occupant agrees to lease the property for a set amount of time. The customer base is also “sticky” meaning that tenants tend to stay for many years instead of just one. Once the tenant moves in, it’s unlikely they will want to uproot their life or operation. They get stability of location, the property owner gets stability of income .

Capital gains are (also) important

Of course you can put your money in an investment and just earn income from it. That would be the same as a CD or bond. But if having the chance for the investment to grow in value is important then real estate investing may be for you. Depending on the property, location and how well it is maintained, the property value may increase over time.

Real estate can produce a double return: monthly recurring income and increase on the property.

You are willing to wait

Real estate can be a good investment if you are willing to wait over a long time horizon. Real estate investing is a way to get wealthy very slowly. Mortgages allow you to control property at a fraction of the price and use future, inflated dollars to pay off the asset. The concept works well when the interest rate and payments fixed but the income and property value continue to increase. The arbitrage over a long period of time makes the property owner very wealthy.

You want a hedge against inflation

The income from real estate is priced annually with leases and the property owner can adjust the asking price up or down as needed. In practice, the income is a hedge against inflation. This is a powerful attribute for real estate because the purchase price is fixed but income can adjust as needed or desired.

Tangible things make you feel safe

There is an advantage to having investments you can touch and feel. Tangible assets are “real” hence why real estate is known as real property. The downside of physical, tangible investments is that they are illiquid and non-fungible. Each property is unique and cannot be compared apples to apples to another property. That is why we have appraisals and seek comparable properties to determine a valuation.

Similarly real estate is illiquid. Unlike the stock market, you can’t liquidate real estate holdings at will. It takes time and effort to sell a property. If you like the tangible aspect of real estate and are willing to overcome the illiquidity, then investing may be for you.