Becoming wealthy and taking control of your finances often involves investing in stocks. However, many of the world’s wealthiest individuals also put a lot of funds into property. Why?
That’s the topic of this post. We look at why it makes so much sense to invest in property and not just equities, and how it could help you build the financial kitty jar you’ve always wanted. By the end of this guide, you should better understand our reasoning, and why a 100% allocation into the S&P 500 might not be the best idea.
Generational Wealth
The top reason is the generational wealth that purchasing luxury real estate can bring. Properties accumulate value for decades, allowing you to pass on money and assets to your family in the future.
Properties are an excellent way to maintain generational wealth because of their fixed-asset nature. Sure, you can sell them, but it’s difficult, expensive, and takes a long time. As such, buying units, apartments, and houses is a way to force prudent behavior (and avoid unnecessary spending on things that you don’t need).
Most properties will last for decades when cared for properly. Some will begin to degrade, but the amount of money required for that is minimal.
Better Control Over Your Investments
Another reason why investing in property makes sense is that it gives you more control over your investments. You’re no longer being buffeted by the vicissitudes of the stock market.
Many people who wind up putting their money into stocks lose it. Either, they don’t have the sophistication of conventional investors, or they simply get caught up in a crash where everyone loses their money. They take out their capital when the price is low and buy when it’s high, at the height of the boom.
With property, these risks are lower, and may never occur again. While the financial crisis of 2008 was disastrous for property prices, systems are now in place that make such an occurrence of events less likely.
Because of this, real estate will likely maintain a more consistent price profile over time. Prices may not rise rapidly in some locations, but probably won’t fall fast in others either.
Furthermore, individual stock investors don’t have any control over the underlying firm. Average Joe can’t tell Nvidia what to do. However, when you own real estate, you can change it however you want to suit your needs while holding it before selling.
Ability To Improve
Related to this, you can actually improve the value of the property. You can’t do that as an investor (unless you manage or work for the company).
Again, this gives you more power. You can take a derelict home and turn it around in a few weeks, walking away with a healthy sum of money at the end of it.
This ability to improve is quite remarkable. Sometimes, you can double or triple the value of your investment without spending much. What’s more, it can happen in a short space of time, perhaps 3 to 6 months if you work quickly on it.
Even if things fall through, you also still have the option to rent out the property. You don’t have to leave it unoccupied, allowing you to generate cash during market downturns.
Lower Volatility
Lower volatility of house prices is another perk. Even at the height of the worst crashes in history, prices rarely fall more than 25%. Compare that to stocks where 80% or even 90% of the value can get wiped out in pretty quick succession.
Lower volatility is also a boon for your nerves. You can figure out your net worth without having to check your brokerage account every few minutes, just in case there’s a flash crash in prices.
Volatility in stocks can be quite extreme. For many people, they are much higher than they originally anticipated. But in the property market, prices generally march higher at a predictable rate, making them an exceptional asset.
Of course, there is a trade-off here. While the volatility of property prices is lower, so too are the returns. Those wanting to gain more of an equity premium can often see their net worth increase more over the long term. It’s just a question of whether they can deal with the ups and downs (particularly the latter).
Multiple Approaches To Building Wealth
Another benefit of investing in property is the ability to approach wealth building in several ways. You don’t necessarily have to follow the same formula as everyone else. For example, you could:
- Build properties and rent them out on the long-term rental market
- Buy properties for short-stays, vacation rentals, and holiday lets
- Invest in units and sell them to investors
- Package deals for investors and collect a fee without requiring any capital
- Buy properties, improve them, and then flip them
- Buy properties, rent them out, remortgage, and collect the profits
- Develop properties or gated communities and sell them to private buyers
With stocks, though, you don’t have as many choices. Yes, you can play around with options trading, but you really need to know what you’re doing to make that work.
Tax Deductions
Another advantage of real estate investing is the tax benefits. As an owner, you can deduct mortgage interest and depreciation from your taxable income, allowing you to keep more of your returns.
When you buy a sizable property, these deductions can be tremendous. Many people get thousands of dollars in savings out of this approach because it means they pay so little tax, if any.
You should get your accountant to calculate these metrics. Depreciation is measured at a standard rate while mortgage interest depends on prevailing interest rates and the terms set by your lender.
Higher Returns With Leverage
You can also use leverage when you buy properties to generate higher returns (more than you might expect in the stock market). Purchasing a property and then flipping it is a highly successful strategy because it’s based on the cash-on-cash return.
Think about it. Imagine if you put $20,000 into a property worth $100,000, using an $80,000 mortgage to cover the difference. Now suppose you improve the property at a cost of $5,000 and sell it in 12 months for $125,000. You just made a gross profit of $20,000, which is 100% of the initial investment, an insane return.
Yes, there are other expenses involved, like using agents and solicitors, but you get the basic point. Investing in property is not like stocks.
You can borrow to invest in stocks or use options, but these are risky. For most properties, you don’t need a PhD to figure out whether they will make you money. All you need is a decent building and a reasonable price, and you’re off to the races.
Hedge Against Inflation
Properties are also a hedge against inflation. Homes, apartments, and other units tend to rise with the general price level (and often exceed it).
As such, many people prefer investing in property to gold. While the latter is a timeless inflation hedge, it’s no longer the only option available to people. Real estate avoids inflation by rising in price and allowing you to rent it at the same time (while increasing rent, too).
Passive Rental Income
Speaking of which, passive rental income is a massive benefit of property over stocks. While some companies pay a dividend, it often requires careful stock-picking, and the actual amount is low. That’s not the case for properties where rentals can cover the mortgage and much more.
Passive rental income also provides “option value” or the “wait and see approach.” For example, suppose you own a property, but you don’t know what’s going to happen next in the market. You could rent it out and then wait and see what happens to the rest of the market. If the price of properties rises, you could sell, or if it falls, you could hold on to your ownership and continue making a return by renting. You’re not just holding onto a dead asset.
By contrast, stocks can stop paying dividends without any notice, and companies can go out of business. Equity valuations can sometimes fall to zero.
Tangible Asset
Finally, property is a tangible asset. You can actually go to its location, physically touch and use it. You can’t do that with paper wealth, like stocks.
This aspect is something that makes property popular in challenging times. Even when economies are crashing, properties still maintain their use value. Ultimately, someone will always want to live in a property because it provides shelter and a warm place to sleep. That’s not the same for stocks and bonds, which don’t provide any of that.
So, that’s a rundown of why you should consider investing in property and not just the stock market. Ideally, you want an allocation in both, but with plenty of properties to fall back on, should something go wrong in the wider economy elsewhere. Putting it on your radar is the road to financial freedom.