Why is Real Estate Investing Such Low Risk?
The answer to the question in the article title is easy, and one word…CONTROL.
It is the only investment I know of that gives me control over all aspects of the investment, mainly because it is the only investment that is so transparent. Think about. If you are investing in stocks, bonds or mutual funds, you have no control over your investment…and you also have no idea of the costs associated with them. They are not transparent at all. The only thing you do know is you are turning over all of your money to a
sales person Financial Advisor (check out the requirements to become one…and compare that to a beautician) who may not even buy the same investment they are selling you. You are buying for the “long hall”, which really means that you won’t see your return on investment until the person that sold it to you is retired…or out of the business. Why would you do that?
Real Estate is Predictable
Real Estate, on the other hand, is predictable. You know, if you educate yourself well, before you even buy what your returns will be. This means you are in control. You simply need to purchase at the right price, finance it properly, pick the right location, and have it managed well. Not every property qualifies, which is why you must educate yourself to be able to recognize a good deal from a bad one.
The good deals come with so many advantages that are not found with other “capital gains” type investments, such as:
- Cash Flow (Income comes in every month like clock work)
- Leverage (You can get financing for real estate if you learn how to write a business plan…again with the education. Try to get financing for your next mutual fund purchase).
- Amortization (If you have cash flow, your tenants pay off your debts. In fact, you should be able to pay off the debt service faster than you thought.
- Depreciation (Isn’t it nice of the government to allow us this deduction for the reduced value of our property…even though it almost always goes up in value)
- Foresight (Change the value of your property by changing the zoning, or improve/rehab a broken down house)
- Broaden Horizons (Start with Single Family, move onto Multi-Family, then commercial and development)
- Forecast Results (You can predict the future much easier, and control the outcome, with good management in place…this may be you in the beginning. Invest in NNN guaranteed lease houses or commercial properties and control the management even more)
- Tax-deferred Income (Many ways this comes into play, not the least of which is through a 1031 exchange. This allows you to sell, profit, re-invest, and delay taxes until…..?)
- Appreciation (See #4 above. Your property, if purchased and set up correctly, WILL go up in value)
Why Cash Flow is King
I prefer to invest for cash flow than for appreciation (flipping) since the tax treatment is far better and I like the idea of steady cash flow and my tenants paying off my mortgage…ahead of time.