Why Invest in Real Estate?
Episode #1 of the course Real estate investing essentials by Symon He
Hi! I’m Symon, licensed real estate broker and investor with over $400M in real estate experience. I’m also the best-selling real estate instructor on Udemy.
Welcome to the Real Estate Investing Essentials! In ten short lessons, you’ll learn the key concepts that every investor needs to know before making their first investment in real estate.
We’ll cover:
• the difference between direct vs. indirect, high vs. low involvement investing
• the many asset classes in real estate available to investors
• the three main investment strategies in real estate
• popular starting points for first-time investors
• the different phases of a typical real estate cycle
• the three different approaches to valuing real estate properties
• the ways to conduct proper market research
For many of us, the real estate market crash of 2008 is quite fresh. How do we avoid getting burned when the next crash inevitability happens? With property values and rents going up significantly again in recent years and in some cases, already back to the 2006 peak levels, it’s more important than ever to make sure you have a solid grasp on what you’re doing before diving into the world of real estate investing.
Why Even Invest in Real Estate?
Why do so many people invest in real estate? More importantly, why should you invest in real estate? I’m sure you’ve heard experts talking about how stocks have, over the long run, outperformed real estate.
Taking a look at the S&P 500, the widely accepted proxy for the overall stock market, we can get a historic stock market return of almost exactly 7% from 1950-2009. If you can average 7% returns consistently, those are very solid investment returns! That means nearly doubling your investment every ten years. Over a 40-year investment horizon, you’d get nearly 15-times your initial investment back, turning $100K into $1.5 million. But know that in any shorter time frame, the returns in any given year is often higher or lower. Over a long-time horizon, though, assuming 7% is a reasonable expectation for the stock market.
So, what about real estate? Factoring in inflation, the real growth in real estate property values from 1970 to peak in 2006 (even before factoring in the crash) is less than 2% a year. Considering the crash, that appreciation is less than 1% above inflation.
Comparing Apples and Oranges
Well, there’s a BIG problem with that comparison. As is often done when people compare stock market returns to real estate returns, it ignores some very important factors.Those real estate returns assume you’d just buy a residential home and sit on it and hope to profit from it based solely on appreciation when you do sell it. So, what is left out? It ignores rental income, much the way stocks generate dividends! And the comparison also ignores the impact of financing, which often allows real estate investors to achieve even higher investment returns.
When done right, real estate investors can often get 10%-plus returns consistently. And if they track the market cycles, as I’m going to show you in this course, as well as utilize smart strategies to buy higher quality investment properties, investors could do even better.
Even in a real estate market that has recovered, we can still find 7%-plus returns from rental opportunities across the US before leverage. Add in the right kind of financing and 12-15%-plus returns are achievable. Are these returns doable in other asset classes, like stocks? Yes, but it is much harder to do, especially for the average investor. Even professional hedge fund managers can’t beat the market!
Real estate is just one of many investment assets you have the opportunity to utilize. It has its own advantages and disadvantages, but when used wisely, it can help you build wealth and passive income and help you diversify your overall investment portfolio.
Tomorrow, we’ll explore the difference between direct vs. indirect real estate investing and the pros and cons of each.
See you tomorrow!
Symon
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