Why property?
In my book Real Estate Riches which hit the New York Times best seller list as well as best seller lists in five other countries including Australia, I go to some effort to explain exactly why real estate is so much better than virtually any other investment vehicle. The findings in Real Estate Riches can be summarised as follows:
- When you invest in any investment other than real estate, you almost always need the entire purchase price in cash. For instance, to acquire $100,000 of shares you usually need $100,000 cash. That same $100,000 however can be used to acquire $300,000, $500,000, $1,000,000 or more of real estate. All over the world banks are going out of their way to offer you money to buy not bonds, not certificates of deposit, not mutual funds, not unit trusts but real estate. The benefits of this leverage are self evident. If your $100,000 investment in shares goes up by 10 percent you would have made $10,000. But with your $100,000 investment in real estate which you use to buy a million dollar property, if it goes up by 10 percent you will make $100,000.
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When you invest $100,000 in the share market you get exactly $100,000 worth of shares. This seems to be so self evident as to be hardly worth mentioning. The reason why the shares are worth $100,000 is because the share market is very efficient. The property market however is very inefficient and as a result it is not necessarily a foregone conclusion that when you use your $100,000 cash to buy a property for a contract price of $1,000,000 that the property is actually worth $1,000,000.
It could be worth less (someone talked you into paying too much for it) or it could be worth a lot more (you just bought a bargain). Both scenarios happen every day of the week. The point to note is that you can acquire real estate worth a lot more than the contract price you agree to.
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Once you have spent $100,000 acquiring $100,000 worth of shares which is worth $100,000 the day you buy it, there is virtually nothing you can do to increase the value of those shares other than hope, pray, and write letters of encouragement to the directors. With real estate however, there are 101 things you can do to massively increase the value of your real estate without even spending much money. Always being one to put my money where my mouth is I have a book with that very title. By way of a second example, painting a weather-beaten house at a cost of $2,000 may well increase the value (and valuation) by $15,000.
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If shares double in value, the only way for most people to get the benefit of that increase in value is to sell all or part of the portfolio. This seems counter intuitive. When real estate increases in value you do not need to sell to reap the benefit of that increase. You can simply refinance - go back to the bank and pull more money out - this does not incur a selling commission or capital gains tax and does not reduce the size of your investment.
These are the reasons why I think property is not just as good as other investments, not just a little bit better than other investments, and not even just much better than other investments, but tens and even hundreds of times better than other investments.