The stock market is going well – too well. Most questions are about if the stock market is smoking hot or going to be eventually on life support. Or in a market ‘correction’. But if it doesn’t do well? What then?
Buy more stocks to annualize your investments? Sell everything and cash in? So, should I buy residential rental properties to guard against a stock market crash? Or balance out my investment portfolio?
Know why your investment planner does not suggest it or counsel you about it? Because they make no money for themselves from you when the topic goes to real estate. Even if they know you can make big money in real estate – they won’t tell you about it. Many of my clients are those same investment advisers.
The answer is yes for residential rental properties. Here’s why.
It does not depreciate fast or instantly vanish in value overnight. You see, real estate does not move as fast as the stock market. Think of it more like a turtle. Unlike lets say, an investment into the Tesla stock, for example, it does not lose its value of depreciate by 50% or more overnight at the news that the CEO had a nervous breakdown or that the sales are bad or that the cash flow for the last quarter is terrible. Real estate moves slowly – and gives you plenty of warning, and it’s easy to move out of it way before anything happens.
Over the course of history, it’s a consistent increase in value. Historically, 10 years, 20 years or more – real estate has outperformed many times over any other investments.
A residential rental property provides you with monthly residual income. Your tenants pay you monthly rent. If you penciled your calculations right, you positive cash flow every month. Tenants have to live somewhere, even is the stock market corrects itself and loses value. Tenants don’t leave your rental property to go buy a house if things go bad financially. Everyone needs to live somewhere.
It’s real. You can see and touch real estate. You can drive to it, it has an address, you can touch it. It’s not a piece of paper or a number on an app in your computer. It’s easier to understand. It’s there. It’s easier to follow. You actually see it in person – it’s real (why it’s called ‘real’ estate).
You can easily borrow to buy real estate as an investment. You can go to a lender and obtain easily a mortgage loan to buy real estate – with a minimal down payment and a sufficient income plan. It’s a totally different story if you go to a lender and want to borrow $400,000 to buy stocks. I don’t think the reception will be quite as warm and friendly by the lender – if you can make the lender stop laughing.
You earn capital appreciation on an amount you never paid for or money you don’t even have. That’s right. Using the same example of $400,000, you earn capital appreciation on the full $400,000 even though you only invested as a down payment 20% or so. You make money from the lender’s money. Pretty cool!
You borrow and someone else pays your loan for you. Basically, that’s how a rental property works. Simple enough. Your mortgage loan, property taxes and maintenance are all paid by someone else with their money, not yours.
Real estate rental properties are full of tax benefits and write offs. Lets gets started with depreciation on the value of the property. Then your own expenses to manage it. It’s a business, and like any businesses, it comes with income and expenses that you can write-off.
You can turn it into something else and never pay tax. That’s right. Lets talk 1031 exchanges.
You can use your retirement plan fund money to buy real estate. That’s right. 401k money and IRAs. And let a professional do it for you.
It’s very liquid. When you need a large sum of money, you can easily cash in and sell a real estate property.
But a residential rental property is not for everyone. Only for the ones that can practice patient market cultivation and think and go long term, and pencil-calculate everything on a yearly basis, in other words spread it out.
It’s a business. You have to property manage. You may get less desirable tenants from time to time. You may have to invest a bit of time, resources, patience and improvements into your real estate assets from time to time. There’s planning and some managing. But in the end, you come out ahead.
When you are ready to talk and make your move. I’m just a phone call away.