Why invest in Real Estate

As an investor, there are many types of assets you can invest in. You can buy stocks, options, bonds, gold, cryptocurrency, art, or even currency. Just like everything else, real estate is an investable asset.

Now, I'm not here to tell you real estate is necessarily better than any of the other assets, but I am here to tell you how it is different. It will be up to you to decide if real estate helps meet your investing goals. This post is not to be taken as financial advice. You should seek a qualified financial advisor for that.

So how do you make money in real estate?

There are three primary methods to make money in real estate (appreciation, cash flow, and debt paydown). We go into details in another post, but to quickly summarize: appreciation is the underlying asset increasing in value, cash flow is money from tenants paying you rent, and debt paydown is from the tenant paying off your mortgage). So if you put $20,000 down on a $100,000 house. At the end of thirty years, your gross return on investment would be the debt paydown ($80,000) + appreciation ($56,000) + rental income ($108,000) = $244,000. This is assuming a 1.5% annual appreciation and $300 monthly rental income. Of course, these are very rough estimates and don't factor in taxes or expenses, but they do highlight the many ways you can make money from real estate.

Why should you invest in real estate?

• Value is easier to determine because you can see how similar homes have sold in the area
• Real estate is less liquid, but that makes it less volatile. Prices don’t fluctuate as much as the stock market. The lack of liquidity helps prevent people from panic selling in a market downturn.
• Diversification. Never put all your eggs in one basket. When diversifying, it’s important to buy into asset classes that have low correlation. More on this in a later post.
• Real estate is a hedge against inflation. It’s easier to print money then it is to build a house.
• Tax benefits. Lots of tax benefits. We talk more about this in length in a dedicated post.
• Leverage. Your broker will charge you more to trade on margin than your local bank will charge you for a mortgage.
• Unlike options, real estate doesn’t expire.
• Inefficiencies in the market such as motivated sellers, inside information, or the ability to add value allows you to get good deals.

While real estate won’t take you on the roller coaster ride that going all in on GME or dogecoin will, investing in real estate definitely shares in the philosophy of playing the long game. To use the colloquial terms of r/wsb, “diamond hands.”