Real estate can be the WORST investment… or the BEST-OF-THE-BEST!
The difference is usually not the asset: It is how you approach it.
Real estate is one of those topics everyone has an opinion on. Some people will tell you it’s the greatest investment ever. Others will tell you it’s complicated, expensive, and, you should simply put everything in the stock markets; set-it-and-forget-it.
The truth: Both are right.
Real estate can be a terrible investment. Buy the wrong property, overpay, ignore expenses, or secure poor financing: Turn a soothing dream into an expensive headache.
But, when approached correctly, real estate is one of the most powerful wealth-building tools ever conceived.
After years working in the industry, and having seen hundreds of transactions, here are the three main reasons why I believe real estate remains one of the best investments you can make.
Real estate as leverage
This is probably the biggest advantage real estate has over many other investments: You get to make returns on money you don’t fully own.
Let’s say you have $100,000, and you decide to invest it in the stock market.
If your investment grows by 7%, you make $7,000.
Now, if we look at real estate; instead of investing your $100,000 directly, you use it as a down payment and borrow another $400,000 from the bank to purchase a $500,000 property. Imagine that property also increases in value by 7%. That 7% is no longer calculated on your $100,000. It is calculated on the entire $500,000 asset, and a 7% increase means the property gained $35,000 in value.
Same market performance.
Completely different result.
That’s the power of leverage.
Of course, leverage works both ways: If a property loses value, your losses are also amplified. This is why buying the right property, at the right price, is critically important.
But, when used prudently, leverage allows investors to control a much larger asset than they could purchase with cash alone.
And, this is where real estate becomes really interesting.
Real estate for cash flow, over time
One common misconception about real estate is that every property needs to generate thousands of dollars per month from day one.
In reality, some of the best investments are not necessarily the ones with the highest immediate cash flow.
A property might break even, or even require a small contribution at the beginning.
But, real estate is a long-term game.
Over time, several things typically happen:
Rents increase.
Mortgage payments stay relatively stable.
Operating expenses become easier to absorb.
The loan balance decreases.
A property that produces little cash flow today may become a significant income-producing asset 10, 15, or 20 years later.
Real estate and debt repayment
This might be my favorite part of real estate investing.
When you buy a property, a large portion of the money used to purchase that asset usually comes from the bank.
And, unlike most debts, this is a debt attached to an income-producing asset that you are not the only person contributing to paying back; your tenants play a part.
Every month, rent comes in. A portion pays expenses and a portion pays the mortgage.
Year after year, that mortgage balance decreases.
Eventually, the $400,000 you borrowed to buy that $500,000 building is gone.
Who paid it? A combination of rental income and time.
Your tenants effectively helped you convert a financed purchase into full ownership of an appreciating asset.
That is an elegant feature of real estate investment.
In conclusion: Is real estate always the best investment?
No.
Real estate is not magic.
Real estate investing requires knowledge, discipline, good management, and the ability to make decisions when the market is not always comfortable.
A bad property can be a terrible investment.
A good property, bought correctly and managed properly, can completely change one’s financial future.
The biggest mistake is not choosing between real estate and other investments.
The biggest mistake is investing without understanding the rules of the game.
Real estate is not about getting rich quickly.
It’s about using time, leverage, tenants, and appreciation to slowly build something much bigger than what you could have created alone.