Why Real Estate is Better than Stocks
The thing I love about real estate is that it allows you to leverage your money. Here’s what I mean. Let’s say that you have $40,000 to invest.
Option 1: Investing in Real Estate. You find an income producing property, maybe a little run down that is only $200,000. You put 15% down, or $30,000 and still have $2,000 for closing costs and $8,000 for upgrades.
Option 2: Investing in Stocks. Say $20,000 goes into mutual funds and $20,000 into an aggressive stock.
Now, move forward one month.
Option 1: Investing in Real Estate. The mortgage payment, even with PMI at today’s interest rates is around $1070/month. This home in my local area, this house would rent for $1200-$1250/month. And yes, there are deals for $200,000 in my area that are habitable!
Now, there is enough money to pay your mortgage and other monthly expenses associated with this property. The upgrades also added additional value to the home, so let’s say you just made an instant $20,000.
You now have a financially independent asset that is not only bringing you a small monthly income, but it continually appreciating. (Yes, in Snohomish County, WA we are still appreciating in our prices and will continue to do so.)
With the “active appreciation” from the upgrades, you now have a property worth $220,000. Your total equity is $60,000, all from your $40,000 investment. Not too bad after 30 days.
Option 2: Investing in Stocks. Let’s be aggressive and say the stocks have increased 10% but the mutual fund hasn’t moved much. You now have $42,000 in that market from your $40,000 investment. Only $2,000 in 30 days? I don’t know if that is even minimum wage.
See how that works? By leveraging your money, you are able to create more money, more quickly. Even if your stocks increased dramatically, you will still have to wait a long time to see the same level of profit. This is why leveraging your money is so perfect!
Now, what happens if eventually the stocks crash and are worthless? What happened to your investment in the stock market? Your real estate investment will still be physically sitting there and is far less likely to lose money. You can even drive by it and take a look, just to be sure it’s safe.
Why do you think that interest rates are far lower for mortgages than for personal loans? Your bankers know that real estate is a safe investment. The safer the investment, the more likely they are to write you a check.
Just for fun, let’s look at it backwards. Between March 2000 and October 2002, the Nasdaq fell 78 percent. Since that time, there have been multiple instances of fraud and manipulation by stock brokers and promoters. That means your $40,000 is now worth $9,240 after the loss.
When was the last time you saw a piece of property lose 78 percent of its value? Ever in just over a year? Even if it did, your $40,000 is worth $48,400 – still ahead of where you started.
Want to know the best part about this? Take a look out a couple years when the investment property has appreciated even more. Now you can pull equity from that home to invest it into another property. Not only are you leveraging your money, but it’s kind of like recycling too. And, I like things that are good for the environment and my pocket book.
I’m not saying investment properties are for everyone; they certainly can be a lot of work and are a huge liability. Done right, they are profitable. If you’re ready to make money with the equity in your home, let me know. There are great deals in every market; you just have to know where to look.
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If you are considering an investment in the greater Seattle area, give me a call. When it comes to real estate, my goals are simple. Let me put your needs first.