Productivity | Strategy | Profitability
Productivity | Strategy | Profitability
Don't Wait to Buy Real Estate - Buy Real Estate, And Wait
The notion that real estate has always been and remains the asset class of smart and dynastic wealth took a beating over the last few decades, says Oliver Taylor.
The naked greed of the banksters who brought about the sub-prime crisis sure didn’t help real estate’s image, and neither does the fact that most areas of human settlement today are more complex investment vehicles. Grapevine stories abound about so-and-so who “lost money on that property.”
When any government overreaches and attempts to cap property market dynamics, it usually makes for more bad press, notwithstanding that government passes legislation to enforce property ownership rights. Let’s be grateful for that at least, and excuse their typically predatory charges on citizens’ property affairs.
All of the above being said, those property rights are the gold, it seems. By virtue of the very fact that we humans tend to settle around our own species, guaranteeing an ever growing realty development market, and when looking at the data, real estate is still king. It’s very often a matter of diligent research and planning, with the right perceptions around what rental property is. Those who “lose” money on investment properties aggravate the human psyche’s predilection for bad news over good. They either gave no real thought to the purchase, or are more traders than investors.
Robert Kiyosaki, speaking on stocks versus real estate with Ken McElroy, pointed out that no one is getting “a deal” on the stock market. Investors buy and hold (ideally) blue chip stocks, but there’s not going to be any massive windfall. Investors hope they go up over time of course, but there’s no possible “value add” potential. Adding value to a rental housing unit might be a refurbishment of the interior that justifies a higher rent, or renting furnished at a premium, as opposed to unfurnished dwellings.
That kind of ability to spin more money doesn’t come with stocks, although of course those deeply embedded in that world make some cash. To be fair, the pros of stocks are that they’re far more liquid, and can sometimes make more in a year than real estate, as stock prices can respond to news that’s irrelevant to the rental housing market.
The average retail investor, statistics show time and again, won’t make money out of medium to low risk stocks, however. Even if above average, money made from stocks still lacks the “cash fluidity” of rental real estate. Buying a house generates (rental) cash flow, and by the law of the time value of money, a pound today is more valuable than fifty next week.
HOW DOES REAL ESTATE COMPARE WITH OTHER INVESTMENT VEHICLES?
When looking at real estate investment, and specifically rental properties, a few obvious differences between real estate and, for example, bonds become apparent. The data clearly shows that rental real estate generally gives greater returns than investing in bonds. Bigger tax benefits come with property as opposed to bonds too. Looking at the risks versus the returns, Bonds are comparatively safe investments, but with duly underwhelming returns. Rental property returns start in the Goldilocks zone, but can become meteoric.
Buying (property) derivatives instead of actual property, you lose the individual ability to wildly capitalise on local happenings (a World Cup, an international conference, or some unanticipated local property boom), as your investment is tied to a property index, homogenised for better or worse. It stands to reason that with ETFs and index tracking funds, rental properties outperform again. These are paper assets, devoid of the potential of rental properties, as well as their cash flow.
Opting for commodities such as gold and other precious metals, oil, and gas over rental property might appear to offer the same potential as real estate. Especially since the petrodollar is dying, and BRICS nations are forging a gold backed system of trade, investors can be forgiven for imagining exciting times ahead for commodities. It’s still buy and sell, however, but more importantly there’s an old saying on trading floors that says “commodities take the stairs up, but the elevator down.” Upticks (such as recently seen) are strong but unhurried — they’re orderly in their climb. Corrections, on the other hand, can be sudden and ugly, and all “gains” evaporate. Today’s commodities markets are also far more volatile in terms of gains and corrections than the legacy understanding of commodities suggests.
Ditto cryptocurrencies and entrepreneurial business. Cryptocurrencies are a blockchain stock market today, and big gains require big risks. As for business, it’s always been high risk. “Business is risky” is the old adage and, depending very much on who and what you’re investing in, it can be years before dividends appear.
Buy and hope, or buy and get a cash flow going while looking ahead to less tax and more benefits from the investment — that’s the choice.
MULTIPLE ADVANTAGES THAT MAKE REAL ESTATE THE BEST ASSET
While it might sound insubstantial to younger citizens, anyone over 50 can remember a time when central banks dared not be anything other than conservative, a big dad, slamming the till drawer shut on citizens’ fingers often enough. They were the kings of stability and fiscal rectitude. In comparison, today whores have invaded the palace! Central banks are printing money as though Rome is burning. Were they just kidding earlier last century then, when they said that kind of reckless behaviour would lead directly to hyperinflation?
Beneath this rather startling and unusual rain of dollars, pounds, and all fiat comers really, real estate strategies that factor in amortisation, depreciation, and the effects of inflation appreciating the asset, are going to shine. These considerations (along with cash flow and tax implications) actually make real estate the most resilient and powerful asset class for investors in 2023 and well beyond.
Amortisation is a factor seldom considered by those who prefer stocks and bonds, but comes standard with a commercial property loan. In a nutshell, amortisation gives an investor the opportunity to offset what would otherwise be a very demanding repayment term, killing their cash flow.
Put differently, in the best interests of property investors making it (and lenders not suffering defaults!), amortisation has emerged as a means to get into property and make it pay, without the immediate heavy pressure of steep repayments. It’s a deferred liability structure that makes it possible for new retail investors to make money out of rental properties. Long term holding of property over time, through thick and thin, also makes the rich get richer. Amortisation facilitates this, and allows property investors to utilise their new cash flow as opposed to losing it all to repayments. The time value of money, once again.
Inflation’s impact on rental property is a mixed bag, but it’s typical for the benefits to outshine the negative effects. High inflation reduces millions of consumers’ ability to secure a mortgage, keeping them in the rental market. As more and more opt for continued renting, demand rises, pushing up rentals. Inflation will also hinder housing development, further cementing a growing rental push.
Taxes are also less than on income derived from short term gains (selling stocks or cashing in bonds). Moreover, depreciation dramatically reduces property taxes over time, something the wealthy understand very well. Put simply, depreciation allows for an asset’s value to be lessened year on year, resulting in a constantly reducing tax liability, whether or not the property’s actual value correlates. Indeed, depreciation can be lessening the tax obligation while appreciation is making the property more valuable over time.
A rental property comes with a cash flow. There are variable expenses to deduct from rental income, depending on where in the world the property is, but real estate can generate a monthly income stream that can do a lot more than zero monthly cash flow can. That potential has huge value, and successful wealth generators know it.
It comes down to personal investment preferences, but by not investing in real estate, investors are prevented from building up equity and amortising their repayments, giving liquidity to further investment. Indeed, without the scope and potential intrinsic to rental property, investment can become a wealth killer, as opposed to a wealth generator. EG