We have become a nation of renters driven primarily by a lack of affordable housing. However, there’s a growing buzz that renting is actually better than owning. More and more people are choosing to rent, even though they can both afford to purchase a home and can qualify for a mortgage. And even more people are forgoing savings and investments to indulge in experiences.
While I love the notion of embracing a carefree, experience-focused, YOLO lifestyle, it’s still important to make sound financial decisions to sustain it. I’m not saying everyone should run out and become landlords, but I do think it’s critical to strive to own real estate in some capacity based on your lifestyle goals. Here are four reasons you should look to add real estate to your portfolio.
4 Reasons Everyone Should Own Real Estate:
1. A Place to Live
We’ll start with the obvious. Clearly, you need somewhere to live, but why rent a place, if you can own? Yes, I’ve read the article by Grant Cardone and I’ve seen the video from “Adam Ruins Everything” that suggest owning a home is a bad idea because it’s not an investment and renting provides flexibility. However, the reality is you need somewhere to live and I’d argue that you can sell or rent out your home if you ever decide to move.
While I agree that a personal residence is not an asset, that doesn’t make the alternative of renting a smart investment. I live in Chicago and use to pay $1,500 in monthly rent or $18,000 annually. Stretched out over 5 years, that’s $90,000 in rent. No equity being built, no tax deductions for interest or property taxes. And while the prospect of paying down a mortgage to build equity is nice, the ability to deduct interest and property taxes give the edge to home ownership. In fact, recently published stories, including one by the New York Times, cite the mortgage interest deduction as one of the main factors driving disparity in affordable housing, while creating wealth for homeowners.
When seeking our first property, I thought you needed to have at least 20% for the down payment. However, I learned about the FHA loan product, which allowed me to purchase a home with only 3.5% down. As an example, on a $300,000 home, that’s only $10,500 down with a monthly mortgage of about $1,500. So for the same amount that I was paying in annual rent, I could have used those funds to purchase a $300k home, with $7,500 left over. And the bonus is deducting the property taxes and interest.
2. Ideal Alternative to Stocks Investment
Maybe you were savvy enough to invest $100 in Bitcoin back in 2010 and have amassed $75 million in cryptocurrency value. Or maybe you bet big on Tesla to see it overtake General Motors in market capitalization, even though Tesla is on pace to lose $950 million this year, while GM will net a $9 billion dollar profit. Clearly, these investment valuations are based on the possibilities of tomorrow as opposed to actual current performance.
Investments valued on speculation, hype and sizzle are responsible for various tech companies with no revenue model commanding off the chart valuations. If this frenzy makes you a bit nervous, you may want to diversify your holdings to include something more practical than the next “Snapface” (as Bill Belichick calls it). Real estate is tangible with a variety of applicable strategies.
Personally, I’m a multifamily advocate, but even within this category there are multiple investment strategies. You can invest in turnkey rentals (typically with providers offering duplexes and single-family homes), apartment syndications, REIT funds or even private lending through personal relationships or crowdfunding sites. Each comes with its pros and cons, but as a piece of a larger investment strategy, real estate can help balance a portfolio and in particular, multifamily has historically proved less volatile than stocks.
3. Tax Benefits
When you start to understand the tax code, you quickly realize it was designed to benefit business owners and real estate investors. Because of that, real estate is the perfect tax shelter for high net worth individuals to help them keep more of their income, but also provides some benefits for everyday people.
Unlike personal residences where you can only deduct interest and property taxes, investment properties allow you to deduct interest, expenses, and depreciation. The depreciation aspect sets real estate apart from other investment tools as you can depreciate the building over the course of 27.5 years. You can even accelerate depreciation on certain items like appliances. When you’re ready to cash out, instead of selling, you can delay paying capital gains taxes by choosing to refinance to pull out equity or doing a 1031 exchange instead. A 1031 exchange allows you to use the equity from one real estate investment to exchange for another investment.
To properly plan out how to leverage real estate for your tax planning, you should seek counsel from a knowledgeable real estate CPA. Notice I said real estate CPA and not accountant. Most accountants and even general CPAs won’t know all the tax benefits and strategies at your disposal, so you need to speak with someone who is focused on real estate tax planning and strategies.
4. Perfect Side Hustle
If you’re not in love with your job and want to escape the rat race, the fourth reason you should own real estate is because it’s the perfect side hustle. If you only have a handful of units, it can be fairly simple to manage. You’ll have to plan for showings, unit turns, rent collection, maintenance and general upkeep, but on average this may take just a few hours a week, with showings and unit turns being the most time consuming. Furthermore, you can outsource a lot of this work while you focus on your day job and finding the next deal.
Many real estate entrepreneurs invest with a goal to acquire enough cash flow to quit their day job. Even if the goal is just to stack some extra cash on the side, real estate can be a great tool to pay for college tuition, fund dream vacations, or buy a luxury car. Before you get visions of yachts, jets, and interviews with Robin Leach, I should note that this is no get rich quick plan, it’s more of a plan to accumulate income-producing assets as quickly as possible to help you transition into a new career. The great thing about real estate investing is you will have flexible hours and can work from virtually anywhere in the world, especially with the technological advances of the last decade.
By no means am I suggesting that everyone should strive to be a real estate guru. However, I do believe everyone should strive to own real estate to some degree. It could be as simple as owning the roof over your head or investing in a REIT. Or it could be more involved such as managing your own portfolio, investing in turnkey rentals, or joining apartment syndications. The right path really comes down to the individual and their goals, time and energy.
Whether it’s a place to live, asset diversification, tax benefits or a lifestyle change, everyone should be looking to own real estate in some capacity. The benefits are plentiful and the options just as abundant. Choose a path that fits your goals and helps you design a sustainable lifestyle.
