You’ve heard that “it takes money to make money.” Which is true. Wealthier individuals are more likely to grow their wealth by investing in real estate. Residential and commercial real estate investing is one of the most powerful ways to build wealth and diversify an investment portfolio.
So why isn’t everyone doing it?
There is a higher barrier to entry vs. buying stocks and bonds. Plus, it’s a longer-term play.
But there is no doubt. Investing in real estate can be a wealth game changer.
I started my career as a personal financial advisor almost two decades ago. I launched my business because I was frustrated by the lack of transparency and personal agendas of other advisors. I even wrote a book about it, “UnBrainwashed Investing: How to Protect Your Portfolio From Today’s Misled Industry.”
My mission is to help people make more informed investment decisions. With that in mind, here are a few reasons I recommend an investment in the real estate market, especially in today’s volatile investment environment.
- Doesn’t Correlate with the Stock Market
Not all real estate investments are alike. Many have heard of publicly traded real estate funds, including REIT’s. Publicly traded funds act more like the stock market. On the flip side, non-publicly traded funds tend to have very low correlation to most other asset classes. This makes it a much more attractive investment to wealthier investors. It doesn’t react when there’s a bad stretch of stock news.
- Better Expected Returns
Successfully professionally managed real estate investments typically deliver returns and cash flow above what is realized in a typical stock/bond portfolio. Typically, investors can expect an 8 – 9% return on, say, the S&P 500. Sometimes higher. With a real estate investment, investors can receive between a 12% to 15% return on their investment. Sometimes it can go as high as 20 to 30%.
There is a return premium on illiquid assets. If your money is tied up or illiquid in something like a real estate investment, there must be a return premium relative to the stock market…otherwise everyone would prefer the stock market and illiquid investments would not be able to raise money. Not many people can give up the option of liquidity on their money. Wealthier investors typically can, so they are able to seek a return premium that is added when you’re speaking about deals that aren’t perfectly liquid.
On top of that, real estate is what’s known as an inefficient market. When you’re dealing with more common investment opportunities, such as securities, more people are willing to buy a security than there are people looking to offload. There’s a return premium added when you’re speaking about deals that aren’t perfectly liquid, making it attractive for longer-term investors.
- Tax efficiency
Real estate investing is more tax efficient than investing in stocks or bonds. Mainly because most real estate involves depreciation. Depreciation gets recaptured at a flat depreciation tax of 25%. Capital gains taxes also apply to real estate and sometimes ordinary income.
To clarify, when we say “professionally managed real estate,” we are not talking about flipping houses, where you’re going to pay ordinary income. We’re focusing mostly on multifamily, commercial, and mixed-use real estate deals that are multi-year projects, so we generally are going to avoid short term capital gains..
Hopefully this clarifies why the wealthiest people in the room often have real estate as part of their portfolio. Investing in real estate is a marathon, not a sprint. I also advise that investors make sure they are investing with professional real estate investors.
Join our live update on Wednesday, June 21 at 11 am ET for details on the Jones Real Estate Access 4 Fund (REAF4). This Fund offers a chance to invest like the pros, with the pros. The Fund is only open to accredited investors. Click here to register for the live update. It is not mandatory to join the live update to join the REAF 4 wait list.
We look forward to helping more investors obtain all of the benefits that come with investing directly in real estate at a more sophisticated level.