There are seven distinct advantages of real estate investment over other types of investments:

ADVANTAGE Number One: LEVERAGE

How many dollars worth of stock can you buy with $100,000 cash? The answer is $100,000 worth of stock. How many dollars worth of real property can you buy with $100,000 cash? The answer is as much as $1,000,000 worth of property assuming a 10% down mortgage loan. If you buy $100,000 worth of stock and it goes up over 5 years at a rate of 5% per year, what have you gained? The answer is $25,000 (not compounded). If you had used the same $100,000 as a 10% down payment on a $1,000,000 property with the same appreciation rate of 5%, you have gained $250,000 in profit. Get the picture?    

ADVANTAGE Number Two: EASE OF FINANCING

When you buy real estate you generally have banks and other lenders falling all over themselves to lend you the money. The reason for this is that banks and other mortgage lenders still consider real estate a safe and secure investment. If they didn't, would they compete for your loan dollars so aggressively? Compared to most other types of business loans, real estate loans usually have the best terms, lowest interest rates and are the most plentiful. Have you ever seen ads for business loans for jewelry, antiques, artwork, stocks, mutual funds or bonds? Of course not ! It's too risky.

ADVANTAGE Number Three: LOW VOLATILITY

Compared to other investment vehicles real estate is the most stable over time.

Even though real estate does have its ups and downs its cycle is almost always more stable than alternative investments such as stocks. The reason for this is that they aren't making any more land! Land is improved with buildings such as homes, apartments, offices and shopping centers in direct relationship to their current need. As the improvements are immobile, expensive and desired by the population they tend to stay occupied over long periods of time thus smoothing out variations in value. But, beware of those bubbles!

ADVANTAGE Number Four: ABILITY TO ADD VALUE

When you buy $100,000 worth of stock for $100,000 what can you do to increase its value? The answer is - nothing. When you buy a $1,000,000 property with your $100,000 cash down payment and a $900,000 mortgage loan, what can you do to increase its value?

Well, you could paint the property, add additional square footage, modernize the bathrooms, put in a new kitchen, put up a fence, add covered parking; there are many ways to increase property value by reacting to market preferences. Also, if you can purchase the property from a motivated seller at below current market value you have added value built-in at closing. Any of the above would be almost impossible with stocks.  

ADVANTAGE Number Five: TAX BENEFITS

I don't know of any other investment vehicle where the U.S. Government gives you money to offset profits and income except real estate.

The IRS understands that your real estate improvements are wearing out over time and have established an incentive to help you upgrade your assets often - this is called depreciation. By allowing a real estate investor to deduct a set amount of loss each year from depreciating improvements you can claim the loss against your profits in the property. Essentially, you are generating tax-free income from your investment, courtesy of Uncle Sam! The depreciation amount taken over time must be recaptured (paid back) at time of sale but there are two good strategies to avoid this as you will see below. Another tax benefit is the capital gain profits from selling a property held for investment for more than one year fall into a tax rate category (capital gain) that is generally much lower than ordinary tax rates.

ADVANTAGE Number Six: RENTAL INCOME

Using our example from above of other investments such as jewelry, antiques, artwork, stocks, mutual funds or bonds - can you rent any of these and generate income? Not Likely.

Since improved real property is a necessary and valuable commodity in the normal course of human life it is highly desired and can be rented quite readily. Factors such as location, size condition, etc. affect the amount of rent but the income stream from rental property is typically steady and reliable. This income stream effectively means your tenant is paying off your mortgage for you. When the mortgage is satisfied you now have a veritable money machine that should keep producing profits for you for many years without ever having to dip into the principal of the asset. Every retirement plan should include this type of investment.

ADVANTAGE Number Seven: EXIT STRATEGY

You bought $100,000 worth of stock with $100,000 cash and now it is worth $200,000. The only way to enjoy the profit is to sell some or all of the stock thus creating a taxable event. The real estate you bought for $100,000 cash down and a $900,000 mortgage is now worth $3,000,000. What is the best way to enjoy some or all of the profit without creating a taxable event?

Why sell an asset that is generating passive income that is basically indexed to the rate of inflation and pay capital gains on the profit? There are at least two excellent strategies allowing you to take some profit without paying any taxes, or, take all of the profit and put it to use with no tax effect. First, you could simply refinance the property and the money received from the new mortgage is tax free income. In other words, start the whole process over again. You could even take the profits from the new loan and buy more property! Second, through an IRS tested and proven program known as a Section 1031 Exchange you can trade your existing property at its new, higher value for more property of a similar kind and not pay any taxes on the transaction as long as you trade for like-kind property of an equal or greater value. In this way you can continue to trade up to larger and more profitable properties while deferring tax obligations. By skillful use of different types of Trusts you can ultimately ensure that the property can pass to your heirs without probate or inheritance tax consequences.