Why is Real Estate Investing So Ideal?
“The best investment on Earth is earth.” – Louis Glickman
Chris Rock once famously explained the difference between rich and wealthy: Shaquille O’Neal is rich, Rock said. The man who signs his checks is wealthy. And if you want to get wealthy in America – to acquire life-changing, generations-lasting wealth – the surest and safest path to do so is by investing in real estate.
What makes real estate the ideal investment? The answer is in the word “ideal”:
I is for Income – commercial real estate produces an income stream as tenants pay their rent. Unlike single-family houses, commercial properties are valued by their net operating income – the difference between the total of all rents collected and the total of all expenses paid out. And commercial real estate with multiple units – like apartment complexes – are much more likely to have positive cash flow than a single-family house that has either one or zero tenants.
D is for depreciation – an income tax deduction that allows a commercial real estate owner to recover the cost of his investment over time, based on the expected wear and tear and deterioration of a property. The owner of an apartment complex can depreciate just about everything on his property except the land itself. The buildings themselves must be depreciated over 27.5 years, but a smart investor can depreciate other assets on the property much faster and realize those tax benefits much sooner. (Disclaimer: I am not a tax attorney and have no desire to be one.)
E is for equity – the difference between the value of a property and what is owed on the property. The owner of a multifamily asset has the great fortune of her tenants paying down her mortgage for her and she benefits from the steady rise in real estate values from year to year (traditionally about 3% per year, slightly more than historical inflation rates). Over time, the accumulation of equity can and does produce significant wealth for real estate owners.
A is for appreciation – beyond the “rising tide that lifts all boats,” a commercial real estate investor can actually control the appreciation of his property. A savvy investor can buy an apartment complex that is rundown or poorly managed and turn it around, improving the property, raising rents, and cutting expenses. And because commercial real estate is valued by net income, every dollar earned by increasing income or saved by reducing expenses increases the value of the property – and there are at least a dozen ways to increase income or reduce expenses in a multifamily investment. A smart, diligent property owner can literally force the asset to appreciate, sometimes in a very short time.
L is for leverage – unlike most other traditional investments, particularly stocks and bonds, real estate is such a good and secure investment that banks are more than willing to lend on it, and buying commercial real estate investment with leverage dramatically increases the return on investment. For example, buying a $1,000,000 apartment complex at an 8% capitalization rate would mean an 8% return on an all-cash investment. But if the investor puts down 25% and borrows the other 75% with a 4% loan, the return on the same property is now 14.81%. (If you’d like a breakdown of the numbers, feel free to send me an email.) That is a powerful way for commercial real estate owners to increase their returns.
Real estate has produced more millionaires than any other industry in American history. It has always been and will always be the “ideal” investment for building true wealth.
Drew Shirley is a Houston attorney with experience in tort and business litigation and business and real estate transactions. Shirley graduated cum laude from Duke University, then received two advanced degrees – a master’s in journalism and a law degree – from the University of Texas at Austin. He joined the Randle Law Office in 2015.