Why I’m Investing in Real Estate

I recently got a question in one of my retirement workshops about investing in rental properties for retirement. This can be a great idea for some investors. In fact, I just closed on my own first investment property. Here are some of the unique benefits to supplementing your other retirement investments with direct real estate:

Income: One of the reasons that I bought the property that I did is that it provides an immediate 14% positive cash flow on the money I put down, even after setting aside a reasonable amount of the rental income to cover maintenance and vacancies. That income can then be reinvested. Once the mortgage is paid off in 30 years, the income will be even higher and much greater than the 4% I could safely withdraw from a portfolio of stocks and bonds. I also wouldn’t have to worry about ever depleting my principal the way I would with stocks and bonds.

Inflation protection: Not only can real estate provide good income, it’s income that naturally keeps pace with inflation. Inflation can also increase the value of your real estate and reduce the real burden of your mortgage over time. For these reasons, it can be a great way to hedge against the possibility of rising inflation, which is generally bad for both stocks and bonds.

Leveraging with low interest rates: Historically, real estate appreciation plus rental income has been significantly less than stock appreciation plus dividend income. What gives real estate an advantage is the ability to purchase it with borrowed money at relatively low interest rates and then have your tenants pay off the mortgage. Yes, you can buy stocks on margin but margin rates are higher and are not tax deductible. You could also be forced to sell your stocks while they’re low to satisfy a margin call.

Tax breaks: Another advantage of rental properties is the ability to write off the mortgage interest, property taxes, and depreciation off your taxes. If you want to sell a property, you can defer the capital gains tax by reinvesting the proceeds in another property. When you pass away, your heirs can inherit the property and sell it without having to pay any tax on all the appreciation.

Control: You can add additional value to real estate by purchasing in an area you believe will appreciate faster than the overall market (the real estate market is much less efficient than the stock market so there are more opportunities to profit from superior knowledge), making improvements, and managing it yourself.

Sound good? Well, next week I’ll take a look at some of the challenges involved with investing in real estate and how they can be overcome.

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