Should I invest in stocks or should I invest in property?
A lot of people ask this question without really analyzing the benefits of each investment method. Stocks are the "easier" investment, have a low barrier of entry, and everyone gets lucky once in a while. What I don't like about them is that you have almost no control of your investment other than buying, holding, or selling. Someone else manages the company, and you are subject to their success. What's really interesting is that when I ask people why they invest in a specific stock, almost no one has a clue about the company's financials or an idea of the company's management track record! They are buying it because people say it will go up, or they have a feeling it will go up, or because they like it.
I have a stock portfolio, but I prefer to invest in real estate. I am in full control of the success of my investment but I can also buy/sell/hold just like a stock. There are many ways to invest in real estate but people today seem to associate it with "speculation".
I recently spoke with a first-time homebuyer and I told her I invest in real estate. She said "oh so you're a speculator?" *facepalm* Yes this is one of the ways to invest in real estate, ie. Buying a place in hopes it will appreciate in the future with no real concern for the fundamentals of the investment. Sound familiar? Seems like the same strategy many amateur stock investors use to me. This is why it is very difficult to build real wealth this way.
I personally prefer the Income Approach. It allows you to make money in multiple ways. Let me go over some of the benefits of this method and why it is not just "speculation".
1. Cash Flow - This is one of the main reasons investors rent out their property. Cash flow allows you to go on that trip to Hawaii, eat that fancy meal, have that extra drink with friends, stay at that nicer hotel, buy that toy for your kid, get that new phone or gadget, etc. You get the point, it improves the quality of your life. All my investments need to be cash flow positive, or I have no interest in it.
- Cash flow = Rent - Costs (Taxes, Maintenance, Mortgage, Insurance, and Property Management Fees)
2. Equity Pay Down - Someone is paying the equity down for you! Almost half of every rent cheque is paying off the principle of your investment. In 25 years you will have a fully paid off asset. Someone else is saving for your retirement, or your kids tuition, or that car you really wanted. You don't even have to do a thing for this, other than keep the place rented.
3. Capital Appreciation - Selling your property for more than what you paid for is the ultimate goal, but timing the market is impossible. With such a large investment, bad timing can be incredibly punishing. If you can't cover your costs during the bad times, you'll bleed money. However the Income Approach PAYS you to wait with cash flow. Keep collecting those rent cheques until the time is right to sell.
4. Tax Write-Off - The interest on your mortgage is tax deductible for your investment property! You can also write-off your mileage, and other associated expenses such as home improvements, furnishings, marketing, etc.
5. Financial Flexibility - If you need to take the equity out of the property for personal use, or another investment, you can re-finance your property to extract that equity out of the property and put it into another cash-flow project. If done right, sometimes you can completely exit all your initial money on your investment and move it to another project. You can get up to 80% LTV of your new appraised amount. For example:
- You bought a property for $400,000
- You put down $80,000 (downpayment) and put in $10,000 worth of improvements (renovations and upgrades) = $90,000
- 3 years later after renting the property out you've paid down $50,000 from Equity Pay Down (rent from tenants)
- The property is now appraised at $550,000
- As mentioned above, you can get up to 80% LTV of your new appraised amount. 80% of $550,000 = $440,000
- You now have access to: ($440,000 + $50,000) - $400,000 = $90,000
- Always make sure your cash flow can cover the refinance amount
- Now you've completely exited your initial investment, leaving you with a cash flowing, capital appreciating asset with no money invested! Take that $90,000 out and repeat!
You can see why I love the Income Approach. You need to do your research ahead of time, crunch the numbers, and make sure it meets the goals you want to achieve. With a good work ethic, the right investment and mindset when approaching these type of deals, they can be incredibly rewarding financially, and will provide the ability for individuals to live life on their own terms.
If this is something you're interested in, give me a shout and I can help you get started.