Why Investing in Real Estate Made Me a Millionaire and Investing in Stocks Didn’t

Martin, our money man and main investing partner, emailed us last night and said simply “I’ve pretty much lost it all”. We’d been shopping for a commercial property to buy to diversify our investments. Martin was once again partner with us on the deal we found, assuming he was comfortable with the numbers.

At least he was planning to before the markets crashed and Martin lost his six figure down payment! Now, sitting on pennies (o.k., not quite, but definitely not enough to make a down payment on a million dollar industrial property), Martin is probably really wondering what so many other people do, “Is real estate a much better investment than stocks?”

My answer is always a resounding “It depends” or “Diversification is best”… but if you change the question and ask me where my money is invested, 90% of my money and my net worth resides in real estate (even excluding my current home).

And yes, I am young – I’m in my early thirties! I am also a millionaire and it’s all thanks to real estate. It’s not to say that stocks won’t make you rich, Warren Buffet is one extreme example of the wealth that can be created through stocks, but I like real estate because:

  1. You Can Kick It! Real estate is tangible. You can drive by a property and tell your friends or family that it is your property. You can also check up on how it’s doing. That is not as easy if you just own shares in a company. There’s nothing to show your friends and family, and most company’s won’t let you sit in on their meetings to see how they are doing!  
  2. Leverage: If you have $16,000 to invest (which is what I started with 7 years ago), you can buy $16,000 worth of stocks and bonds. But, if you buy real estate, you can buy a property worth $160,000 (which is exactly what I did). While some stock investors are able to buy on margin (when you only put down a portion of what the stock is worth), this is a sophisticated and high risk move that only experienced stock investors typically make. If your stocks go up in value by 5%, you’ve made $800. But if your property goes up by 5% you’ve made $8,000! This is on the same $16,000 investment. This doesn’t even take into account the other ways you can make money from real estate….which leads me to my third reason I love real estate.  
  3. There are three ways to make money from real estate: Appreciation, which we discussed above, rental income, and other people’s money (your renters) paying the mortgage down. Even if your property is decreasing in value, you are still getting paid rent and that rent is paying down the mortgage, and the surplus after expenses are paid is hitting your pocket!  
  4. Control: As a shareholder of a company, you have no control over your investment. And, you never really know what’s happening behind closed doors. I don’t need to start naming the corporate disasters of the last decade like Nortel, Enron and WorldCom for you to really understand what I am saying! But with real estate you do have control! If electrical bills are too high you can change the light bulbs to more efficient ones, seal the windows, and take other measures to reduce the costs. If you are losing money, you will know it very quickly! And you will be able to take measures to improve this situation. With shares, what can you do if your shares in Nike drop 15%? You can sell more or you can buy more… that’s it.  
  5. Creative ways to make money. A simple stock investor has two ways to make money from stocks… appreciation in their value and dividends. I owned stock with dividends once. The $30 cheque once per year was incredibly rewarding. Because you have control over your property, and there are three different ways to make money from the property, there are plenty of creative techniques to try to make more money from your asset. Some people rent out the garage separate from the house. In the right location, you could sell advertising space or just get price reductions on work done in exchange for some advertising (ever asked a painter what kind of discount you can get on their work if you put up one of their signs on your lawn??), you can add vending machines or laundry facilities, you can change the density of the property (add more units… more units means more rent), or you can change the usage of the property to sell it to someone who can make better use of it (if you are in a commercial area, an office developer might want to pay big bucks for a properly zoned property to develop on). There are dozens of ways to turn a simple house into a money making machine with creativity. The same can’t be said for stocks.  
  6. Access to the Equity without selling the asset. In the example of the $16,000 I used to buy my first investment property, I was holding most of that money in mutual funds and GIC’s. When I cashed out, I had to pay tax on the gains! So, while I actually had just under $20,000, after the government took their share, I only had $16,000. With real estate, when you need a chunk of cash, you can refinance a property or take out a secured line of credit against the equity you’ve built up in the property. This means that you get to continue making money from the rental income on that property AND someone else continues to pay down you mortgage AND if property values are appreciating, you will continue to have an appreciating asset AND you get the money you need – without taxes to pay too!  
  7. And speaking of taxes… real estate has a lot of tax advantages. Taxes vary by province and state so I won’t get into all of the different advantages… but suffice to say that there are plenty of opportunities to write off expenses against your income, write off the interest on your mortgages, and reduce capital gains taxes.

With so many reasons to love real estate, I haven’t been able to go back to the markets. It’s not to say you should do that too! Real estate isn’t a very liquid investment, and once you own it you still have work to do (unlike stocks). It’s a personal choice, but I know Martin, our money man, is wishing he’d never put his money in the hands of his trusted stock broker. Even in our absolute worst real estate investment we broke even…and in less then 2 months he lost 40% of his money…and worse for him is he lost a significant portion of the down payment he was going to use to buy the commercial property. Maybe some of the stocks will come back, but he’s afraid that a lot of his money is lost forever.

Real Estate Investment – How to Profit During a Housing Market Slump

Currently, real estate investment is a hot subject matter. Nearly everyone is wondering if they should sell, buy, trade or avoid investing altogether. In recent weeks, the topic of trading real estate has made headline news. With the lack of qualified buyers and housing market slump, many investors are discovering it is sometimes smarter to trade like-kind properties.
 
When a real estate investment is traded for like-kind property, it is referred to as a 1031 exchange. In order to participate in 1031 exchanges, real estate investors must retain the services of a Qualified Intermediary (QI). Investors engaging in 1031 exchanges must adhere to Internal Revenue Service guidelines set forth in Section 1031 of the IRS code.
 
1031 exchanges allow investors to exchange properties while deferring capital gains and depreciation recapture taxes. Real estate is not the only property that can be exchanged through 1031. All types of investment property including equipment, boats and airplanes can be traded.

 
1031 exchanges prohibit the exchange of houses used as personal residences or vacation homes. However, if the real estate is rented out on a regular basis, houses can be traded for other rental homes.
 
Another popular real estate investment strategy is purchasing distressed properties such as foreclosure or bank owned houses. Distressed properties typically require considerable repairs or renovations, but this is not always the case. Foreclosure homes are sold under market value through public auctions. If no one bids on the property, it is returned to the bank.
 
Currently, bank owned homes are being sold for around 80 cents on the dollar. Also referred to as real estate owned or REO properties, investors must negotiate with the bank’s loss mitigation department. Purchasing REO homes generally requires more time and effort than investing in foreclosure homes. Investors should be prepared to engage in multiple counter-offers with lenders offering REO houses for sale.
 
Many real estate investors purchase bank owned and foreclosure homes for the purpose of house flipping. Flipping houses for profit is not nearly as easy as the popular television shows portray it to be. Simple repairs oftentimes turn into major expenses. Major repairs require licensed contractors, permits and inspections. Before investing in distressed properties, make certain to estimate the true cost of repairs. Otherwise, you could end up with an investment nightmare.
 
A lesser known real estate investment is probate properties. When a person dies, everything they own must pass through the probate process. Probate can last between six months and three years. During this time, the estate is responsible for taking care of the real estate. This can include paying mortgage payments, property taxes, insurance, and maintenance. If the estate does not have sufficient funds, a probate judge can order the probate executor to sell the real estate.
 
Probate properties are oftentimes profitable gems, but locating them does require a bit of detective work. Real estate investors will need to visit the court house where probate matters are handled. Probate information is a matter of public record and contains valuable information about the estate, as well as the contact information of the estate administrator.

 
Many estate executors are unaware they can sell real estate during probate. Offering to buy their property can eliminate financial burden and help the executor expedite the probate process. If multiple heirs are entitled to probate property they must all agree to sell the real estate unless a judge has ordered the administrator to sell the property.
 
These are but a few real estate investment opportunities. While the media projects constant gloom and doom, it is important to remember that real estate has always been one of the most valuable investment opportunities. Those who invest now can potentially reap massive profits later. Just remember, don’t invest more than you can afford to lose.