The majority of my retirement is invested in real estate for one simple reason: I can’t find a better place to invest for maximum returns. The rest of my portfolio has been in stocks, money market and bonds and besides increasing my stress levels with some wild fluctuations, those just have not produced the results I had hoped for. To demonstrate what I mean, I am going to take one of my best stock investments – Apple, and compare it to one of my rental properties. These are actual* numbers over a period of four years with an initial cash investment of $23,000.
The first comparison will be regarding cash flow. In the last four years, my Apple stock made $1080 in dividends income compared to my real estate net cash flow (less ALL expenses**) which was $20,180. Now are you seeing why I like real estate for investing.
The second comparison will be in appreciation. I had a very good four years with my Apple stock. Its stock value increased from $23,000 to $49,725 resulting in an appreciation of $26,725. It more than doubled in value! Unfortunately, that didn’t happen with all my stocks in that same time period. Don’t even ask about my precious metals funds; I get depressed just thinking about it! With the $23,000 invested in my rental property, the appreciated total was $50,000; double what Apple did! That is based on a sales price of $255K, in today’s market it would be under contract on one day at that price.
Now is where it gets really exciting because you can greatly increase your gains through sweat equity. Unlike traditional investing which can be risky; real estate is a much more controlled and low risk investment opportunity. In real estate you have the opportunity to buy low, increase value through upgrading/updating and then reap the benefits. Doing a fix and flip is totally based on this income producing technique. My calculation for sweat equity was determined by new appraised value less initial cash investment less loan value which came out to $35,000. This is why I love fix and rent.
This scenario provides still another benefit that many people don’t even think about. I call it Leverage Equity Income. The renter is not only paying interest, insurance and taxes but he is also paying down the principle on your loan! On this particular rental the renter paid off $10,000 worth of equity.
The graph above provides a striking visual of the difference between my best stock and one of my rental properties. A more comprehensive depiction of my entire stock/bond portfolio would demonstrate even more dramatically the advantage of real estate investing.
Other benefits of owning real estate investments
Another major tax benefit is being able to offset cash flow income with depreciation. Instead of paying capital gains on $20,180 over the four year period we were able to offset a net loss of over $3000. This year we will make over $7600 in cash flow which is over 30% cash on cash return on investment. To top it off, we will only have to pay capital gains on a little over $2000.
Last but not least is that you can insure your investment properties against loss. Can you imagine being able to do that with all the companies you buy stock in!? If they “burned down” you could re-coup a good portion of your investment! Unfortunately we have little or no control over what happens to those companies but we can insure our rental properties for many different types of losses.
Every investor and every investment is different, so results will vary for everyone. I have had a few loses with properties but over time the good outweighed the bad. Despite the loses, I have never come close to losing 97% of the value of a house as I did with some of my stocks.
* I actually had 11500 in Apple stock, but double to make it the same investment as my property.
** This was net but did not include depreciation.