10 Advantages of Investing in Real Estate Instead of Stocks

Here's a very interesting post outlining 10 Advantages of Investing in Real Estate Instead of Stocks

"Here are 10 reasons why you should put your money in real estate instead of stocks.

1) Leverage. The most powerful reason for investing in real estate is because you can use other people’s money to buy it. A bank will loan you 80% to 90% of the purchase price for a house and ask you only to provide the remaining 10% to 20%. This allows you to do so much with so little. Moreover, you–not the bank–realize 100% of the appreciation in value of that house. If the house gains 10% in value over two years, and you decide to sell it, the bank doesn’t take an 80% cut. You get to keep that entire 10% gain.

By contrast, if you asked a bank to loan you money to buy stocks, they would laugh you out of the building. Why is that?

2) Less Risk. A bank will loan you money to buy real estate, but not stocks, because it thinks that real estate is a less risky investment. And it is. Real estate is a physical, tangible asset. A share of stock may be pegged to a business, but, in the end, it remains a paper asset that, if managed poorly, can lose the majority of its value. Just a couple of weeks ago, Bear Stearns lost over 93 % of its value in two days. That doesn’t happen with real estate. In the last 20 years, the largest drop in real estate prices has been about 14 %, which occurred over a two-year period from 2006 to 2008"

For the rest, go here

He brings up an interesting point about leverage - most traditional banks will not lend you money to buy stock, even if it is stock in their own bank! However, Margin Accounts are quite common. Basically, brokers loan investors money to buy stock, and the stock is collateral for the loan. If the stock price drops enough, the investor may be forced to either deposit more cash or sell the stock(at a loss).

Point #2 is crucial - real estate does have substantially lower risk than stocks. Even if the house on it burns to the ground, the land still has value. The value of a property simply can't go to zero, barring a severe toxic waste problem or the like, while stocks can and do go to zero, even huge companies with household names. Compare the Fortune 500 list from a few different years...or just look at Enron.

I'm not saying not to invest in stocks - that would be one-sided and could keep you from making some profits on the gains in stocks. Just don't keep all of your eggs in one basket. My strategy at present is to have a large portion of my investments in real estate, but also some in individual stocks, index funds, precious metals, and other investments.

To your success,

Dave
Creating Real Estate Investors

Some basics on investing in rental properties

I stumbled across an interesting blog today and thought I'd share an article the author posted on Investing in real estate for cash flow .

"Creating cash flow through real estate is my favorite method for making money. Simply put, this form of investing involves buying a property (an apartment, a house, etc.) and renting it out. The rent payments cover the mortgage, insurance, and tax payments. What is left over after you subtract the mortgage, insurance, and tax payments is passive income. That is the kind of cash flow that liberates people from jobs.

"This is not “flipping” properties or buying foreclosed properties. This type of investment involves buying and holding a property. There are various details, including incredible benefits such as tax-free rental income and 1031 exchanges, associated with investing in real estate for cash flow..."

For the rest of the article, go here

A few things to consider is that of course your numbers will differ depending on market conditions where you invest, your credit, and other factors.

For one, investor loans are typically anywhere from 0.5%-1.5% higher than mortgages for people buying a personal residence. This will impact your cash flow.

Also, once you get more than just a few properties, you’ll likely want to hire a property management company to handle the tasks involved with running your properties. This will help you avoid the “landlord trap” where landlords spend all their time managing their properties and have no time left to go out and acquire more properties, thus placing a ceiling on their income and nearly eliminating one of the most common reasons why people invest in real estate: time freedom.

Property managers’ fees vary, and in real estate nearly EVERYTHING is negotiable, but you can expect to pay up to the amount of one month’s rent for them to find you a tenant, and an ongoing monthly management fee which varies widely. As you acquire more and more properties, economies of scale start to work in your favor here, too

Additionally, the author states in the beginning of the article that this strategy is not buying foreclosures. I'd suggest that buying foreclosures is merely one more tactic that can be part of your overall property acquisition strategy. The more different strategies and tactics you can use, the better your chances of making a profit from a property.

Many landlords do make the "mistake" of buying at full retail, then renting it out. While this can provide cash flow and appreciation in value over the long term, buying properties at a discount can substantially increase your profits.

I put "mistake" in quotes above for emphasis - if they are investing in properties, they are at least doing SOMETHING that many people don't, in order to escape the rat race. That's a definite plus. But paying retail for a property is essentially leaving money on the table. In real estate, you make your money when you buy.

To your success,

Dave
Creating Real Estate Investors