As I prepare my first series on this blog on real estate investing (REI), I thought I’d share an introductory post on why I even chose that route to begin with. A lot of people have asked me if I prefer real estate over stocks, or what the difference is from an investment perspective. Here is my take on it, based on my experience.
Price Negotiation
In REI, I get to choose my price point. If others outbid my offer, I simply move on to another property. By sticking to the numbers and my investment strategy, I will ultimately land on a property that’s a “good deal” based on my initial analysis. With stocks, I don’t have as much control over my purchasing power. I understand there are buy limit orders that cap your purchase price, but there’s no room for negotiation, as there is in real estate between the buyer and seller.
Control over Business Operations
As a landlord, I get to determine the conditions of the lease and how much I charge for parking, pets, etc. This is a minor convenience, but I do like knowing that I’m running my own business, versus buying a company’s stock with no control over the decisions made.
Free Equity
With a cash-flowing property, the accumulating equity is entirely free. Because the tenants’ monthly rent covers the mortgage (and capEx, vacancy, etc.), you don’t have to pay a dime out of pocket, yet building equity in the house over time. This completely blew my mind, and when you apply leverage on this, the benefits are exponentially multiplied.
Infinite ROI
This upside of REI only applies for properties bought with a specific investment strategy, namely BRRRR. Basically, if you can purchase a house under market value and invest less than 75% of the ARV (after repair value), you can continue investing in real estate with the same dollars. BiggerPockets has in-depth articles that explain BRRRR better than I can. The crux of this method comes after you do the necessary repairs and refinance. You can take back all or most of the money you put into the house, and snowball that into a second investment property. I’ve created an infographic to help explain this better (this is an oversimplified example).
Initially, you put $150k down (20%) on a house that is selling for $750k, and take out a loan of $600k. You know that after repairs, this house is worth $1M. Assuming you can borrow up to an LTV of 80%, you can pull out $200k with a cash-out refinance (math geeks: $800k (80% of home value) – $600k (outstanding loan) = $200k). After subtracting repair & refinance costs of $50k, you’re left with your initial investment of $150k, which you can roll into another house. So essentially, you have zero dollars invested into the first house, yet still cash flowing every month. This is how the infinite ROI comes about.
These are just a few of the reasons why I love real estate investing. Because REI is so versatile and allows for different strategies, investors can choose one that they’re most comfortable with. Some prefer commercial real estate, mobile homes, syndications, long-distance investing… the possibilities are endless. And this is all before diving into the tax benefits of REI, which will be for another post.
I would love to hear what you like about real estate investing, or why you might prefer stocks instead.
Disclaimer: I’m not saying real estate investing is safer, a better investment, or yields a higher return than stocks. I’m just explaining why I prefer real estate, based on my basic knowledge and experience. This preference is different for everyone, depending on your risk tolerance, knowledge, and interest.
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