It’s time for the final installment of this series, and yes, we saved our favorite for last! One of the most awesome ways to find reliable profits from your investments is to put your money in real estate.
Real Estate Vs. Stock Market
We love to talk about real estate investments at HGC, but many investors wonder if real estate is as good a place to put their investing dollars as the stock market. This is a fair concern! There are several factors to consider when it comes to choosing how to invest your capital, like your location, available time, time-horizon, taxes, passive income, and leverage.
In the end, both real estate and the stock market are viable options for knowledgeable investors. The important question is: which is a better choice for you? Let’s compare the investments.
Your location has no impact on your ability to invest in the stock market. You have the same access as everyone else in the country.
This isn’t true for real estate.
Some parts of the country show very little appreciation in the real estate market, but may have excellent rental rates when compared to the cost of the property. In other locations, it’s difficult to rent a single-family home and make the mortgage payment, but the possibility to see rapid appreciation exists.
If you’re interested in investing in real estate, understanding the area is paramount:
- Which neighborhoods are improving?
- Which neighborhoods are declining?
- How much are the rents in each part of town?
- How much have home values increased over the last five years?
Consider that investing in your own backyard is most convenient. However, the most fertile investing grounds may be out of driving distance. Many investors choose to invest outside their community, but this requires more time and work.
Are you interested in making money quickly or are you committed to 20 years down the road? Both the stock and real estate markets have something to offer for either short-term or long-term investing.
Day trading can be lucrative, especially if you’re able to leverage your money with the use of options and margin accounts. Keep in mind that day trading is highly competitive and technical. The action is fast, furious, and stressful. Well-equipped day traders have access to candlestick charts, Level II Quotes, and real-time news services. If you’ve never even heard of a candlestick chart, you have a lot of work to do. Day trading isn’t for the uninformed.
Long-term stock trading is familiar to most investors. Warren Buffett may be the ultimate long-term investor. You can take your time when making buying and selling decisions.
There are also short-term investing options within real estate:
- Rehabbing. You’ve seen the weekend television shows. You find a home in need of repair, purchase it, repair it, and sell it. If all the numbers work, you’ll make money.
- Flipping. This is similar to rehabbing, but the properties require very little to no repairs. Find a great deal and take your cut when you resell it.
- Speculative construction. You can find a nice spot to build and sell at a profit. If you have the knowledge to act as your own general contractor, there’s more profit available. Keep in mind that it’s not guaranteed that you can make a profit.
Or you can consider long-term real estate investing methods:
- Renting. By renting your property, you can potentially cover the cost of your mortgage. You should receive a nice payday each month from your rents after the mortgage is paid in full. Remember that rents usually increase over time. You’ll also have 100% equity!
- Appreciation. In many parts of the country, home prices can increase considerably. Renting your investment property is a way to bide your time until you achieve a significant level of appreciation.
Investing in the stock market long-term doesn’t have to take a lot of time. A little time each week reviewing your investments and looking for new investments can be done at your leisure. Short-term investing can be quick and easy in the case of bonds and other short-term instruments. Day trading is a full-time job.
Real estate is a different story. It’s often said that real estate is a lousy investment but a great business. Real estate involves buyers, sellers, banks, renters, real estate agents, and a lot of time. Real estate isn’t an investment that you can deal with for two hours each weekend.
Real estate also has many costs. There’s maintenance, repairs, and insurance, just to name a few. Real estate investing can be highly lucrative, but it requires more time than most other types of investment.
The capital gains tax rate is lower for most people than the income tax rate. Keep in mind that the length of the investment period has an impact on which tax rate you pay. In most cases, if you hold the investment for less than 365 days, you’ll have to pay the income tax rate on your earnings.
Real estate has its own set of tax rules:
- Rental income is taxed as ordinary income. It’s no different than income from your job. The tax is due the year after the money is earned.
- Short-term flips (less than 12 months) are taxed as ordinary income. The same story applies.
- Long-term investments (more than 12 months). A property held for more than a year before sold is subject to capital gains taxes.
- Property taxes. While homeowners often receive reductions in property taxes, investment owners typically do not.
- Tax breaks available to landlords. Repairs, interest,depreciation, travel, and insurance are a few of the deductions you can take as a landlord.
Always be aware of the tax implications of all of your investments, and consult your tax professional every year as regulations are updated regularly.
Stock market investors can receive passive income in the form of dividends. These companies can find a way to invest their profits so they give part of it back to the investors. Real estate investors can receive rent payments and grow equity. Selling the property, refinancing, or getting a second mortgage are means to access that equity.
Your stock market investing efforts can be multiplied by utilizing options and margin accounts. A margin account permits the investor to borrow against his current holdings and purchase additional equities.
Options permit the investor to purchase or sell a stock at a predetermined price at some point in the future.
Real estate investors can borrow 80% or more of the purchase price. With just $20,000, you can control a $100,000 property.
If you can find a good enough deal, there are private lenders that will gladly loan you 100% of the purchase price.
Many individuals and families count on their investments to build up an emergency account, college funds, and retirement savings. Saving money on investment taxes is one very important way to increase the amount you are putting away.
As a young person just starting out, it may seem like there’s all the time in the world to worry about investments, college funds, and retirement. But, you’d be surprised how quickly those issues become a true reality.
The strategies in this guide will give you insight as you navigate the world of investments. Use these strategies, helpful hints, and valuable information to plan wisely and save money on your investment taxes. There’s no better time to start thinking about all of this than right now!
“In this world nothing can be said to be certain, except death and taxes.”~Benjamin Franklin