At The Motley Fool, our primary investing focus is on individual stocks -- which we view as the most powerful tool out there for long-term wealth building. But there are other options, and one that's long been popular is real estate. For those looking to branch out from Wall Street to something near the corner of Elm Street and Summit Avenue, Motley Fool Answers co-hosts Alison Southwick and Robert Brokamp have invited a special guest to join them for this podcast: Thomas Castelli, a tax strategist with The Real Estate CPA, who will take them and their listeners on an exploratory ramble through the world of real estate investing.
In this segment, he goes over the biggest reasons a person should consider making it part of their financial strategy.
A full transcript follows the video.
This video was recorded on March 5, 2019.
Alison Southwick: Why should someone consider investing in real estate? It was very compelling to you.
Thomas Castelli: There's a bunch of reasons. We could discuss three or four of them. The main one, especially for your listeners who may be interested in stocks, is "access and control." When you're investing in the stock market, per se, you're investing in a company. You're relying on their management team to really drive the returns for you and you really don't have that much control over those returns. You can go to their proxy meeting, but you're not really going to get any real influence over that company.
When you're investing in real estate, in many cases you're doing it directly yourself -- if you're going to buy your own single-family house or your own apartment building -- and you're going to have direct control over the entire asset and the way you want to run it. And for some people that's comforting. The control is in their hands. And in other instances, like when you're investing in small partnerships, you may not be the managing partner of that entity, per se, but you might have a relationship or can develop a relationship quite easily where you can have the influence and control. That access to the managers. For some people that's a good reason to do it. There's an entire sect out there that believes that you should control it, so some people like that aspect of it.
Another reason is it's a "proven asset class." The core business model of real estate is you're going to buy a plot of land. You're going to develop it and sell it at a profit, or you're going to hold it and rent it, or you're going to acquire an already existing building and hold it for rent. The fact is, shelter is a basic human need. It's been that way for thousands of years and it's going to continue to be that way hopefully for thousands of years. I don't see that business model going anywhere anytime soon and neither do a lot of people.
The supply and demand factor is built in inherently. In 1990 I think the population was around six billion. Fast forward to 2019, around 30 years, and it's over 7.5 billion. That's 1.5 billion people added in 30 years, but guess how much land was developed in the last 30 years? Basically none, unless you count the dredging of islands. But the reality is that land's going to continue to increase in value, especially in those areas that are desirable and people want to live. That's one reason.
Another reason is "tech isn't going to change." You see tech changing all these industries and revolutionizing industries in ways that people can't foresee, but at the end of the day you can't live in the internet, so the internet and tech isn't going to replace real estate. It's going to be there.
The third reason is "multiple profit centers." Real estate has appreciation as the first profit center. You buy it, you hold it, and eventually the price rises and you're going to have a return on that. There's something called "principal paydown." Most of the time when you buy real estate you're not buying it in all cash. You're buying it with leverage. You're buying it with debt on it. Your tenants will end up paying down a part of your principal every month increasing your equity in the building. That gives you another form of return.
There's, of course, the rental cash flow from it, and then there's the tax benefits, which in and of itself is a profit center. I think we're going to get to that a little later.
The final reason some people like it is because it's "a hard asset." You can touch it. You can feel it. It has intrinsic value. It's not a piece of paper. It's physical. You could break down the components of a building and sell it and still cover your costs.