The advantages of investing in real estate are numerous as compared to investing in stock markets. First advantage of owning rental houses is that you can use leverage of five-to-one compared to the two-to-one in stocks. For example, if an investor buys a $100,000 house, he or she can do so with an investment of $20,000 financing the balance of $80,000 thus owning $100,000 of real estate. Conversely, an investor who owns stocks can invest (“leverage”) the same $20,000 and borrow $20,000 from the brokerage firm where they maintain an account; or from a bank who will accept that as collateral.
Both examples involve investing $20,000. In the real estate scenario, the investor has obtained a $100,000 asset. The stock investor will have $40,000 of stock or mutual funds. If both increase in value — let’s say 5% the first year — the real estate investor has made $5,000, while the stock investor has made $2,000. That is significantly more for the real estate investor on the same $20,000 investment. If you compound this over 20 or 30 years it could account for a considerable difference of tens if not hundreds of thousands of dollars.
The second advantage of owning rental properties is that the investor can take depreciation starting the first year, thereby reducing the tax burden. Stocks and mutual funds cannot be depreciated to lessen the tax burden.
The third reason, and for many the most important one, is that people can touch and feel real estate -it is tangible.
As a rental house increases in value, the owner can “harvest” profits by taking out a new loan or refinancing, thus cashing out. This new money can be used to purchase other houses, increasing the value of the portfolio and creating a higher and larger return. If this process is utilized every few years an investor could own five, six or even 10 rental houses after making one initial purchase. Remember, $100,000, $200,000 or even $300,000 of real estate only requires an attritional $20,000 to $40,000 investment.